The dawn of the market era and the onset of the First Industrial Revolution in the late eighteenth century brought with it a new academic field called economics. In their attempts to understand the new forces let loose by coal-powered steam technology and factory production, the founding fathers of the new discipline—Adam Smith, Jean-Baptiste Say, and the like—looked to the new field of physics for a set of guiding principles and metaphors to fashion their own theories of the workings of the marketplace.
Sir Isaac Newton’s mathematical method for discussing mechanical motion was all the rage at the time. It was being purloined by virtually every serious thinker to explain away the meaning of existence and the ways of the world.
Newton declared that “all the phenomena of nature may depend upon certain forces by which the particles of bodies, by causes hitherto unknown, are either mutually impelled toward each other, and cohere in regular figures, or are repelled and recede from each other.” Early on, every school-child is introduced to Newton’s three laws, which state that
A body at rest remains at rest and a body in motion remains in uniform motion in a straight line unless acted upon by an external force; the acceleration of a body is directly proportional to the applied force and in the direction of the straight line in which the force acts; [and] for every force, there is an equal and opposite force in reaction.1
Anxious to ground their musings in the mathematical certainties of physics, Adam Smith and his contemporaries argued that just as the universe, once set in motion, acts automatically like a well-balanced mechanical clock, so too does the marketplace. While God is the prime mover of the universe, man’s innate competitive self-interest is the prime mover of the marketplace. Just as the laws of gravity govern the universe, an invisible hand rules over the affairs of the marketplace. Picking up on Newton’s observation that “for every action there is an equal and opposite reaction,” Smith and others argued that the self-regulating market operated in the same fashion, with supply and demand continually reacting and readjusting to one another. If consumers’ demand for goods and services goes up, sellers will raise their prices accordingly. If the sellers’ price becomes too high, demand will slacken, forcing the sellers to lower the price to spur demand.
Adam Smith exalted Newton’s systematizing of the physics of the universe as “the greatest discovery that ever was made by man,” and enthusiastically borrowed metaphors from Principia and Newton’s other works to fashion classical economic theory.2
The problem with using Newton’s mechanics to try to understand the workings of the market is that his physics tells us only about speed and location. The great twentieth century scientist and philosopher Alfred North Whitehead once quipped that when it comes to the question of matter in motion, “as soon as you have settled . . . what you mean by a definite place in space-time, you can adequately state the relation of a particular material body to space-time by saying that it is just there, in that place; and, so far as simple location is concerned, there is nothing more to be said on the subject.”3
Newton’s laws of matter in motion don’t really help us understand much about how economic activity operates, and are a thin reed by which to anchor the entire discipline. In fact, they actually give us a false sense of how economic activity unfolds because they don’t take into consideration the passage of time and the irreversibility of events. In Newton’s cosmology, all mechanical processes are, in theory, reversible. For every +T there must be a −T in Newtonian mathematics. Take for example the classical example of billiard balls bumping up against each other on the table. In Newtonian physics, any action on the table is theoretically reversible because the laws of matter in motion make no allowance for the passage of time. But real economic activity is all about the irreversibility of events—how energy and material resources are harnessed, transformed, utilized, used up, and discarded.
It wasn’t until the second half of the nineteenth century, when physicists articulated the first and second laws of thermodynamics—the energy laws—that economists had a scientific basis to accurately describe economic activity. But by that time, economic philosophy was so mired in Newtonian mechanical metaphors that its practitioners were unable to part with these theories, even though they were based on scientific assumptions that were largely inapplicable to economic practice.
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.
To get a fix on how the first and second laws work in the real world, think about burning a chunk of coal. None of the energy that was contained in the coal is ever lost. Rather, it is transformed into carbon dioxide, sulfur dioxide, and other gases that are dispersed into the atmosphere. Although the energy remains, we can never reconstitute the dispersed energies back into the original piece of coal and use it again. Rudolph Clausius, a German scientist, coined the term entropy in 1868 to refer to energy that is no longer usable.
Clausius realized that work occurs when energy goes from a higher concentrated state to a dispersed state—in other words, from a higher temperature to a lower temperature. For example, a steam engine does work because one part of the machine is very hot and the other very cold. Whenever energy goes from a higher to a lower temperature, less energy is available to perform work in the future. If a red-hot poker is removed from a furnace, it immediately begins to cool because heat flows from the hotter surface to the colder surroundings. After a while, the poker is the same temperature as the air around it. Physicists refer to this as the equilibrium state—where there is no longer a difference in the energy levels and no more work can be done.
The question that comes immediately to mind is “Why can’t all of the dispersed energy be recycled?” Some of it can, but it would require using additional energy in the recycling process. That energy, when harnessed, increases the overall entropy.
Often, when I do a lecture on thermodynamics, the question arises as to whether I’m not being a bit overly pessimistic, given that the sun, our energy source, is going to burn for billions of more years and provide enough energy for all of our species’ needs on Earth for as long as we care to ponder. True enough. But there is another source of energy on Earth that is far more limited—the energy embedded in material form in fossil fuels and metallic ores. These energies are fixed and finite, at least in the vast geological time frame that is important to our survival as a species.
Physicists explain that, from a thermodynamic perspective, the Earth functions as a virtually closed system relative to the sun and the universe. Thermodynamic systems can be divided into three types: open systems that exchange both energy and matter; closed systems that exchange energy but not matter; and isolated systems that exchange neither matter nor energy. The Earth, in relation to the solar system, is a relatively closed system. That is, it takes in energy from the sun, but except for an occasional meteorite and cosmic dust, it receives very little matter from the surrounding universe.
Fossil fuel is a prime example of a materially embedded form of energy, which for all intents and purposes, is a finite resource that is quickly depleting and will likely never reappear on Earth, at least in any time frame of interest to our species. Fossil fuels were formed over millions of years from the anaerobic decomposition of dead organisms. When these fuels are burned, the spent energy, in the form of gases, is no longer able to perform work. While it is theoretically possible that sometime in the distant future—millions of years from now—a similar process might yield a comparable reserve of fossil fuels, the likelihood of that happening is so remote and the time scale involved so distant, that it is all but a moot point.
Rare earths are another example of the inherent thermodynamic limits that we face on Earth. There are seventeen rare earth metals—scandium, yttrium, lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, and lutetium—that are used in a wide range of industrial and technical processes and embedded in technologies and products that are critical to the survival and well-being of society. They are called “rare” because they are limited in availability and many are quickly being depleted to meet the needs of a growing population and globalizing economy.
Albert Einstein once pondered the question of which laws of science were the least likely to be overthrown or seriously modified by future generations of scientists. He concluded that the first and second laws of thermodynamics were most likely to withstand the test of time. He wrote:
A theory is more impressive the greater is the simplicity of its premises, the more different are the kinds of things it relates and the more extended its range of applicability. Therefore, the deep impression which classical thermodynamics made on me. It is the only physical theory of universal content which I am convinced, that within the framework of applicability of its basic concepts, will never be overthrown.4
Even though the transformation of energy, in all of its various forms, is the very basis of all economic activity, only a tiny fraction of economists have even studied thermodynamics. And only a handful of individuals inside the profession have attempted to redefine economic theory and practice based on the energy laws.
The first effort to introduce the laws of thermodynamics into economic theory was made by the Nobel laureate chemist Fredrick Soddy in his 1911 book Matter and Energy. Soddy reminded his economist friends that the laws of thermodynamics “control, in the last resort, the rise or fall of political systems, the freedom or bondage of nations, the movements of commerce and industry, the origin of wealth and poverty, and the general physical welfare of the race.”5
The first economist to take on his profession directly was Nicholas Georgescu-Roegen, the Vanderbilt University professor whose 1971 landmark book, The Entropy Law and the Economic Process, caused a minor ripple at the time, but was quickly dismissed by most of his colleagues. Herman Daly, a student of Georgescu-Roegen and later an economist at the World Bank, and currently a professor at the University of Maryland, built off Georgescu-Roegen’s magisterial work, with the publication of his 1973 book, Toward a Steady State Economy. The book forced open a discussion at the margins of the economic profession by introducing the ecological sciences into economic thinking and, equally important, laid the foundation for later discussions around applying the operating assumptions of sustainability into the economic field.
In 1980, I published Entropy, with an afterward by Georgescu-Roegen, hoping to widen the conversation beyond economics to encompass the totality of the human experience. The book recasts history from a thermodynamic perspective, with particular attention to the entropic consequences brought on by the advances of human civilization. Entropy was one of the first books to examine, in depth, the entropic impacts of the industrial revolution on climate change.
Looking back at the past century of efforts to recast economic theory in thermodynamic terms, what stands out is how utterly impenetrable the field has been to rethinking the scientific basis of its own guiding assumptions. Even in the last several years, as more and more business schools around the world have rushed to introduce ecological considerations and sustainability issues into the curriculum, and have started to pay greater attention to the centrality of energy-related concerns and climate change, they have attempted to do so under the auspices of classical and neoclassical economic theory, whose operating assumptions are at odds with the laws of thermodynamics.
As long as Newton’s long shadow casts itself over economic theory, it is unlikely that economics, as a discipline, will be able to accommodate the growing schisms that threaten all of its most basic assumptions. Economic historian E. Ray Canterbery notes that taking on the likes of Adam Smith becomes increasingly daunting because he rides on the coattails of the great Sir Isaac Newton. He writes, “From time to time, a cluster of economists consider conventional economics ripe for revolution, but any economic revolutionaries will have to go to the barricades against the genius of Isaac Newton as well as against Adam Smith and his long line of followers.”6 Now however, for the first time, the many cracks in the theoretical foundations of the discipline are threatening to tumble the edifice of classical economic theory.
The fault line that runs through all of classical economic theory is the fundamental misunderstanding of the nature of wealth. John Locke, the English Enlightenment philosopher, argued that “land that is left wholly to nature . . . is called, as indeed it is, waste.” Locke turned the second law of thermodynamics on its head by proclaiming that nature itself is useless and only becomes of value when human beings apply their labor to it, transforming it into productive assets. Locke wrote:
He who appropriates land to himself by his labour, does not lessen but increase the common stock of mankind. For the provisions serving to the support of human life, produced by one acre of inclosed and cultivated land, are . . . ten times more, than those, which are yielded by an acre of Land, of an equal richnesse, lyeing wast in common. And therefore he, that incloses Land and has a greater plenty of the conveniencys of life from ten acres, than he could have from an hundred left to Nature, may truly be said, to give ninety acres to Mankind.7
The laws of thermodynamics tell us something quite different. Economic activity is merely borrowing low-entropy energy inputs from the environment and transforming them into temporary products and services of value. In the transformation process, often more energy is expended and lost to the environment than is embedded in the particular good or service being produced.
In this regard, the economic process mirrors the biological processes in nature. When the laws of thermodynamics were first articulated, biologists were at a loss as to how energy continually moves from an ordered to a disordered state while living systems appear to operate in the exact opposite direction, continually remaining ordered.
Harold Blum, the renowned twentieth-century biologist, explained that living organisms don’t violate the second law but are merely a different manifestation of its workings. Living creatures, observed Blum, are nonequilibrium thermodynamic systems. That is, every living thing exists far away from equilibrium by continuously feeding off available energy from the environment, but always at the expense of increasing the overall entropy in the environment. Plants for example, take in energy from the sun in the process of photosynthesis, and that concentrated energy is either consumed directly by other animals or indirectly when animals eat other animals. By and large, the more evolved the species, the more energy it consumes to maintain itself in a nonequilibrium state and the more spent energy it spews back into the environment in the process of staying alive. Erwin Schrödinger, a Nobel laureate physicist, captures the essence of the thermodynamic process by observing that “what an organism feeds upon is negative entropy; it continues to suck orderliness from its environment.”8
What the biologists are saying conforms with the way we understand the workings of life. We are continuously taking energy into our bodies every time we eat and, in the process of staying alive, are continually depleting energy and contributing to entropic waste. If the energy intake were to stop or if our bodies were no longer able to properly process it because of disease, we would die. At death, our bodies quickly decompose back into the environment. Our life and death are all part of the entropic flow.
Chemist G. Tyler Miller uses an abbreviated food chain to explain how available energy is processed and entropy is created at every stage of expropriation in ecosystems. He begins by pointing out that in devouring prey, “about 80 percent to 90 percent of the energy is simply wasted and lost as heat to the environment.”9 Only 10 to 20 percent of the energy of the prey is absorbed by the predator. That’s because transforming energy from one creature to another requires an expenditure of energy and results in the loss of energy.
Miller describes the incredible amount of energy used and entropy created in a simple food chain comprising grass, grasshoppers, frogs, trout, and humans. Miller calculates that “three hundred trout are required to support one man for a year. The trout, in turn, must consume 90,000 frogs, which must consume 27 million grasshoppers, which live off of 1,000 tons of grass.”10
Now, let’s look at the thermodynamic consequences of converting nature’s resources into food for human consumption in a complex, industrial civilization and what it portends for how we perceive the wealth of nations. Consider the energy that goes into a beefsteak:
1.It takes nine pounds of feed grain to make one pound of steak.11 This means that only 11 percent of the feed goes to produce the beef itself, with the rest either burned off as energy in the conversion process, used to maintain normal body functions, or extracted or absorbed into parts of the body that are not eaten—like hair or bones. While we bemoan the energy inefficiency and waste of driving gas-guzzling cars, the energy inefficiency and waste of supporting a grain-oriented meat diet is much worse. Frances Moore Lappé, in her book Diet for a Small Planet, points out that an acre of cereal produces five times the protein of an acre used for meat production.12 Legumes produce ten times more protein and leafy vegetables produce fifteen times more protein per acre than beef production. Nearly one third of the grain grown in the world today is feed grain for animals rather than food grain for direct human consumption; so while a small portion of the wealthiest consumers luxuriate high up on the food chain, hundreds of millions of other human beings face malnutrition, starvation, and death.13
2.Farmers have to use large quantities of fossil fuel–based petrochemical fertilizers, pesticides, and herbicides to grow the feed grain. Additional fossil fuel is expended to operate farm equipment. Trucks, trains, and ships, using even more fossil fuels, must be deployed to transport the grain to giant, mechanized feedlots where it is consumed by the cattle.
3.On the feedlot, the animals are administered a host of pharmaceutical products, including growth-stimulating hormones, feed additives, and occasional antibiotics, again using more energy. The cattle are crammed together in close quarters—feedlots sometimes contain as many as 50,000 or more head of cattle—where they are subject to an infestation of flies that spread diseases like pink eye and infectious bovine rhinotracheitis.14 To prevent these diseases, highly toxic insecticides derived from fossil fuel, are sprayed from high-pressure hoses, fogging the pens with a cloud of poison.
4.Once fattened, the cattle are transported for hours, and even days, in vans along interstates, on the way to the slaughterhouse—again, expending additional fossil fuel energy.
5.At the slaughterhouse, the animals enter the killing floor, single file, where they are stunned by a pneumatic gun and fall to the ground. A worker hooks a chain onto a rear hoof and hoists the animal upside down over the slaughterhouse floor and then slits its throat, letting the blood drain out.
6.The dead animal moves along an electricity-powered disassembly line, where a machine strips the animal of its hide and organs are removed.
7.Electric power saws are then used to cut the carcass into recognizable cuts, including chuck, ribs, brisket, and steak.
8.The cuts are tossed onto electric-powered conveyer belts, where several dozen boners and trimmers cut off and box the final product.
9.The vacuum-packed cuts of beef are then shipped to supermarkets across the country in air-conditioned trucks.
10.Upon arrival at the supermarket, the cuts are repackaged in plastic made out of fossil fuels, and displayed in air-cooled, brightly lit shelves at the meat counter.
11.Customers drive their cars to the stores to purchase the steak and store it in their freezer or refrigerator, before cooking it on their gas or electric stoves and consuming it.
The energy that goes into the beef at every step of the conversion process is tiny compared to the expenditure of energy used to grow the feed, fatten the animal, transport the steer to market, slaughter the animal, package the cuts, and send them to their final destination on the family table.
That’s only part of the energy story. The other part is the entropy bill. Cattle and other livestock are the second leading contributor to climate change after buildings, generating 18 percent of greenhouse gas emissions. This is more than what is produced by worldwide transport. While live-stock—again mostly cattle—produce 9 percent of the carbon dioxide derived from human-related economic activity, they produce a much larger share of more harmful greenhouse gases. Livestock account for 65 percent of human-related nitrous oxide emissions—nitrous oxide has nearly 300 times the global warming effect of carbon dioxide. Most of the nitrous oxide emissions come from manure. Livestock also emit 37 percent of all human-induced methane—a gas that has 23 percent more impact than carbon dioxide in warming the planet.15
Finally, that one pound beefsteak is only temporary and, upon consumption, is digested by the body and eventually ends up back in the environment in the form of used-up energy or waste.
What, then, are we to conclude about the nature of gross domestic product (GDP)? We think of GDP as a measure of the wealth that a country generates each year. But from a thermodynamic point of view, it is more a measure of the temporary energy value embedded in the goods or services produced at the expense of the diminution of the available energy reserves and an accumulation of entropic waste. Since even the goods and services we produce eventually become part of the entropy stream, for all of our notions of economic progress, the economic ledger will always end up in the red. That is, when all is said and done, every civilization inevitably ends up sucking more order out of the surrounding environment than it ever creates and leaves the Earth more impoverished. Seen in this way, the gross domestic product is more accurately the gross domestic cost, since every time resources are consumed, a portion becomes unavailable for future use.
Despite the incontrovertible fact that all economic activity creates only temporary value, at the expense of the degradation of the resource base on which it depends, most economists don’t look at the economic process from a thermodynamic perspective. Enlightenment philosophers, by and large, came to believe that the pursuit of economic activity is a linear process that invariably leads to unlimited material progress on Earth, if only the market mechanism is left uninhibited so that the “invisible hand” can regulate supply and demand. French Enlightenment philosopher and revolutionary Marquis de Condorcet captured the euphoria of the new age of progress when he proclaimed,
No bounds have been fixed to the improvement of the human faculties . . . the perfectibility of man is absolutely indefinite; . . . the progress of this perfectibility, henceforth above the control of every power that would impede it, has no other limit than the duration of the globe upon which Nature has placed us.16
Giddy over the prospect of creating a material cornucopia on Earth, the classical economists, with the exception of Thomas Malthus, were united in their belief that human industriousness could create a utopian paradise. The very idea that an acceleration of economic activity might result in a degraded environment and a dark future for unborn generations would have been unfathomable.
This ideological blind spot shows up in nearly every one of the underlying assumptions of classical and neoclassical economic theory. Perhaps no concept is more highly prized among economists than the notion of productivity. Economists define productivity in terms of output per unit of input. A premium is placed on performing a given task as fast as possible. A more appropriate thermodynamic measure of productivity, however, would emphasize the entropy produced per unit of output.
I recall a study done more than thirty years ago on how much energy is needed to manufacture an automobile. It turns out that much more energy is used than is actually necessary. The extra energy is expended to speed up the process and get the car off the assembly line quicker. This is true across the supply chain. Our obsession with speed of conversion and product delivery comes at a cost—the expenditure of additional energy. And greater use of energy means more energy wasted and a buildup of entropy in the environment.
We have come to believe that by increasing the speed of activity, we somehow save energy, when in thermodynamic terms, the opposite is the case. Not convinced? Have you ever found yourself driving on a back road in the middle of the night only to realize that you are nearly out of gasoline, with no idea how far the next gas station might be? The first inclination of many drivers is to hit the gas pedal and speed up in hopes of finding a gas pump. We rationalize that by going faster we will improve our chances of reaching the gas station before we run out of fuel, which is at odds with the laws of thermodynamics. By driving slower, we increase the distance we can travel and improve our prospects for reaching the gas station.
When neoclassical economists talk about productivity and economic growth as a measure of output per unit of input, the inputs they have in mind are capital and labor. Yet, when economists analyze the actual economic growth in the United States and other industrial countries, the amount of capital invested per worker accounts for only about 14 percent of the increase, leaving 86 percent of the growth unaccounted for. Robert Solow, whose theory of economic growth landed him a Nobel prize, says quite candidly that the missing 86 percent is “a measure of our ignorance.”17
It took a physicist to explain the apparent enigma. Reiner Kümmel, of the University of Wuerzburg in Germany, constructed a growth model that included energy, along with capital and labor inputs, and tested it against growth data over a period between 1945 and 2000 in the United States, the United Kingdom, and Germany, and found that energy was the “missing factor,” accounting for the rest of the productivity and economic growth.18
Robert Ayres, a professor of environment and management at the INSEAD business school in Fountainebleau, France, who was trained in physics and devoted much of his professional career to studying energy flows and technological change, and Benjamin Warr, a research assistant, constructed their own three-factor input model and tested it against the economic growth curve during the entire twentieth century in the United States, and then carried out subsequent studies of the United Kingdom, Japan, and Australia. Ayers and Warr found that adding energy to the input model explained “nearly 100% of the Twentieth Century economic growth for each of the four countries.” What the Ayres and Warr growth model clearly shows is that “the increasing thermodynamic efficiency, with which energy and raw materials are converted into useful work,” accounts for most of the increased productivity gains and growth in industrial societies.19
The critical role that energy plays in productivity and profit margins becomes crystal clear when we descend down to the micro level of individual firms. I recently dined with Gabriele Burgio, the visionary CEO of NH Hotels, in one of his hotels in Madrid. NH is the market leader in both Spain and Italy and is Europe’s fifth-largest hotel chain, with over 400 properties.
Burgio is on the executive committee of the Third Industrial Revolution Global CEO Business Roundtable. A kind and soft spoken gentleman, whose personal life reflects his passionate commitment to a green future and sustainable economic development, Gabriele is obsessive about energy efficiency. Why? He explained to me over a vegetarian meal that 30 percent of his hotel overhead and operating costs is energy-related, constituting the second biggest cost after human labor. For Gabriele, paying attention to thermodynamic efficiencies and new ways to advance productivity is not an arcane economic concept but, rather, a practical business tool. His success in making the NH Hotel brand a market leader in Europe is in no small part attributable to the tremendous cost savings that he has achieved in reducing energy use and creating more energy-efficient operations—cost reductions that he passes on to his hotel guests in terms of cheaper prices for high-end accommodations.
NH Hotels has introduced an online control system called Datamart, which continuously monitors energy use throughout the hotel, using information to minimize waste while optimizing the comfort of guests. Between 2007 and 2010, NH achieved a dramatic 15.83 percent reduction in energy consumption, a 31.03 percent reduction in CO2 emission, a 26.83 percent reduction in waste generation, and a 28.2 percent reduction in water consumption.20
NH is currently pioneering the concept of “Intelligent Rooms,” a real-time monitoring system that can keep up-to-the-moment information on water use, lighting, air conditioning, and heating consumption, and adjust to the changing needs of guests over a twenty-four-hour period. Guests who use less energy than the norm are rewarded for their eco-conscious behavior at check-out time, with credits on their World NH Loyalty cards, which are redeemable for reduced rates during their next stay at an NH Hotel.
NH is also in the early stages of converting its hotels into micro–power plants. In Italy, the company has already installed thermal solar energy in 15 percent of its hotels. Its Vittorio Veneto hotel in Rome is equipped with photovoltaic solar energy, which provides 10 percent of its total energy needs. NH is currently in the planning stages of building the first zero-emissions hotel property in the world. In anticipation of the market introduction of electric plug-in vehicles in 2011, NH has also become the first hotel to include free recharging points at some of its properties.
Wood and paper products used in NH hotels come only from sustainable forests, and all guestroom amenities and accessories are made of “bio” materials with low environmental impact. All waste produced in NH hotels is recycled, and the toilets, showers, and taps use state-of-the-art technology to minimize water use.
The hotel chain has even set up a supplier club—made up of forty or so companies—whose product lines and supply chains are constantly being monitored, evaluated, and upgraded to conform to the energy requirements and ecological prerequisites established by NH Hotels.
By saving energy and creating eco-friendly hotels, NH is profiting and, at the same time, helping to establish a sustainable business operation that provides reasonable room rates for its guests. The guests, in turn, can enjoy their travel accommodations knowing that they are reducing their carbon footprint and doing their part to steward the biosphere. All of NH Hotels’ energy-saving technologies and business practices have dramatically increased the company’s productivity, allowing it to optimize services with greatly reduced input costs.
Since virtually every economic activity of modern industrial life is made with and run by fossil fuels—petrochemical fertilizers and pesticides for agriculture, construction materials, machinery, pharmaceutical products, fiber, power, transport, heat, light, and so on—it stands to reason that thermodynamic efficiency is central to the story of productivity and economic growth.
But, so, too, is the entropic loss. We need to be continually reminded that whenever we increase the use of energy to accelerate the economic process, the productivity gains must be weighed against the increased entropy that flows into the environment. In the fossil fuel–based industrial age, the burning of coal, oil, and natural gas greatly accelerated economic growth and led to a dangerous buildup of CO2 (spent energy) in the atmosphere, resulting in a fundamental shift in the climate on Earth. “Haste makes waste” is an age-old adage that reflects an intuitive understanding of the entropy law at work. In terms of thermodynamic efficiency, then, productivity is as much a measure of entropy produced per unit of output as speed per unit of output.
For most of the twentieth century, the price of oil was so low that little attention was given to thermodynamic efficiency in the production and distribution of goods and services. And before scientists understood the relationship between burning carbon fuels and global warming, there was little concern about entropic flow. This has now changed. Peak oil per capita and global peak oil production have been reached, forcing a dramatic rise in the price of energy. At the same time, the accumulated entropic emission of industrial-based CO2 into the atmosphere has altered the temperature of the planet and put the world into real-time climate change, with dramatic effects on agriculture and infrastructure.
The simple but profoundly disturbing reality is that fossil fuels and rare earths are fast depleting and the entropic debt from past economic activity is mounting at a rate that far exceeds the biosphere’s ability to absorb it. This sobering situation calls for a fundamental reassessment of the assumptions that have guided our notions about productivity in the past. From here on, productivity is going to have to be measured in a way that takes into account both thermodynamic efficiencies as well as entropic consequences.
Economists often retort that they do take the entropy bill into consideration by factoring in what they call “negative externalities,” or deleterious effects that market activity has on third parties not directly involved in the exchange process. The problem is that the full cost over time to third parties, society as a whole, the environment, and future generations is never taken into account. If it were, the commercial players would, more often than not, have to pay out compensation far in excess of their profits and market capitalism wouldn’t survive. Being forced to pay an occasional government fine, tax, or damages resulting from civil suits for the negative effects that commercial activity generates doesn’t begin to address the true nature of the entropy bill.
The reason most economists just don’t get it is that they fail to understand that all economic activity is borrowing against nature’s energy and material reserves. If that borrowing draws down nature’s bounty faster than the biosphere can recycle the waste and replenish the stock, the accumulation of entropic debt will eventually collapse whatever economic regime is harnessing the resources.
Every great economic era is marked by the introduction of a new energy regime. In the beginning, the extraction, processing, and distribution of the new energy are expensive. Technological advances and economies of scale reduce the costs and increase the energy flow until the once-abundant energy becomes increasingly scarce and the entropy bill from past energy conversion begins to accumulate. The oil era followed this curve over the course of the twentieth century, peaking in 2006.
But will the TIR energy curve follow a similar trajectory? It depends. While sun, the wind, and other renewable energies are sufficient to provide the energy needs of our species and fellow creatures for as long as our solar system exists, they come with their own entropic constraints. To begin with, renewable energies require material scaffolding. Photovoltaic cells, electric batteries, wind turbines, compact florescent bulbs, and many of the new communications technologies of the Third Industrial Revolution rely, in part, on rare earth materials. A report issued in February 2011 by the American Physical Society and the Materials Research Society, warned that a shortage of some of these rare earth materials could, in the long run, undermine large-scale efforts to deploy the new clean energies.21 Since many of these rare earth materials are by-products of mining more abundant minerals like copper, there is no immediate concern about shortages. Already, however, there is a heady discussion about finding alternative metals, or even biologically derived substitutes, should we face a shortage sometime in the distant future. Researchers in the burgeoning fields of biotechnology, sustainable chemistry, and nanotechnology are confident that they will be able to find cheaper and more efficient alternatives to these rare earths in the coming decades to service an emergent TIR infrastructure.
A far greater concern in the long run is the potential entropic impact of having available a virtually unlimited supply of clean renewable energy at prices so cheap as to be nearly free, just as in the case with the fall in the cost of information collection and dissemination that occurred as a result of the IT and Internet revolutions in the past two decades. One’s first reaction is likely to be, “Great! Unlimited, nearly free renewable energy. Why worry?” Again, recall that the Earth is a partially closed system that exchanges energy with the solar system but little appreciable matter. If we had a virtually unlimited supply of cheap, green energy, we might be more inclined to convert the Earth’s limited low-entropy matter into goods at an ever-accelerating rate, increasing the entropic flow and accumulating more matter chaos—dispersed matter no longer available to do useful work.
Consider, for example, the mining of aluminum. We could extract and manufacture aluminum for commercial purposes using green energy to drive the process. Over a period of time, however, the aluminum rusts and the loose molecules are randomly dispersed back into the environment and become part of the entropic flow. They will never be regathered and reconstituted back to the original aluminum ore from which they came.
This suggests that while we will need to transition into the new, distributed green energies, it will also be necessary to use these energies more parsimoniously to make sure that we do not strip our planet of the low-entropy matter that is equally critical to support life on Earth. From a thermodynamic perspective, the most important lesson we can learn is how to budget our consumption patterns to conform with nature’s recycling schedules, so that we can live more sustainably on Earth.
Although there is a worldwide discussion on balancing budgets, when politicians, business leaders, and most of the public consider budget restraints, they give little consideration to the ultimate budget constraint that is dictated by borrowing nature’s wealth. Lest we doubt the disconnect, whenever there is the slightest suggestion of taxing gasoline or carbon emissions to encourage energy savings and efficiencies to reduce global warming emissions, much of the public is quick to protest. Yet, the faster we expropriate nature’s wealth and the more quickly we consume it, the more scarce resources become and the more pollution we create, making everything more costly across the supply chain. When prices of everything we use and consume go up, the increased costs show up everywhere, including what government needs to spend on public goods and services to maintain our way of life.
Mature ecosystems in nature act quite differently than what we are accustomed to in society. In a climax ecosystem like the one we see in the Amazon for example, the thermodynamic efficiency is as close to a steady state as possible (a perfect steady state is impossible because all biological activity results in some entropic loss). Yet in these climax ecosystems that have developed over millions of years, the consumption of energy and matter does not significantly exceed the ecosystems’ ability to absorb and recycle the waste and replenish the stock. The synergies, symbiotic relationships, and feedback loops are finely calibrated to ensure the system’s ability to maintain a continuous balance of supply and demand.
I note that biomimicry—the idea of studying how nature operates and borrowing best practices—is becoming an increasingly fashionable pursuit in product research and development, economic modeling, and urban planning. We’d be well-served by studying how climax ecosystems balance their budgets, and applying the lessons to balancing our own budgets within society and between society and nature.
All of this is painfully obvious, which makes one wonder whether economists might be better served by being trained in thermodynamics before they take up their discipline. Frederick Soddy, Nicholas Georgescu-Roegen, Herman Daly, and I previously emphasized the role that thermodynamic efficiencies play in determining productivity and managing sustainability in our own books on the subject, backing it up with anecdotal evidence from across the supply chain throughout history. But what makes the Ayers/Warr analysis particularly pertinent is that it provides evidence over an extended period of time to support the supposition—the kind of hard data that economists could seize, if they chose, to rethink economic theory. For the most part, they choose to ignore the obvious.
Given the central role that thermodynamic efficiency plays in productivity and economic growth, I asked John A. “Skip” Laitner, one of our global team’s valued economic analysts from the American Council For an Energy-Efficient Economy (ACEEE), to create a working model that tracked changes in energy efficiency in the twentieth century to see what insights we might glean in preparing the way for a transition to a TIR paradigm. Laitner’s study reveals that, while the level of energy efficiency in the United States steadily increased between 1900 and 1980, from 2.5 percent to 12.3 percent, from that time on it has hovered around 14 percent, reflecting the maturation of the Second Industrial Revolution energies and infrastructure. This means that for the past thirty years, we have been wasting 86 percent of the energy we use in the production of goods and services.
While the thermodynamic efficiency has flattened, the entropy bill from past economic activity has climbed dramatically. The estimated cost of air and water pollution and the depletion of nonrenewable resources was $4.5 trillion in 2010, or 34 percent of the nation’s GDP—double the percentage in 1950. These figures don’t even take into consideration the escalating entropic bill from global warming gas emissions, which, if measured over the full duration of their future impact, would dwarf the US and world GDP by a magnitude too incalculable to measure.
It’s a given that 100 percent thermodynamic efficiency is an impossibility. Laitner’s model as well as those of others, however, suggest it’s possible to triple the current level of efficiency to nearly 40 percent over the next four decades. The US government’s National Renewable Energy Laboratory calculates that if all commercial buildings were retrofitted and rebuilt using state-of-the-art, energy-efficient technologies and practices, it would reduce energy use by 60 percent. If the installation of rooftop photovoltaic power systems were added to the mix, it would be possible to achieve an 88 percent reduction in the use of conventional energy. If all new commercial buildings were green-positive power plants, the increase in energy efficiency would be even more striking. A comparable push could reduce the conventional energy used in the nation’s housing stock by 60 percent.
How much would all of this cost? Implementing the infrastructure improvements in the nation’s commercial and residential buildings would cost approximately $4 trillion over a forty-year period, or about $100 billion a year, but would generate a cumulative energy bill savings of $6.5 trillion, or approximately $163 billion per year. Assuming that the infrastructure improvements are financed and paid for out of the energy savings at around a 7 percent discount rate, the benefit cost ratio is a robust 1.80. In other words, for every dollar invested in energy efficiency and/or renewable energy systems, the return on investment would be $1.80.
The reconfiguration of the nation’s power grid, from servo-mechanical to digital and from centralized to distributed, would also significantly increase thermodynamic efficiencies across the economy. The current electricity generation and transmission system only operates at an efficiency of 32 percent. This level of efficiency has remained unchanged since 1960, when the current Second Industrial Revolution infrastructure matured. Amazingly, what the United States wastes in energy in the production of electricity, is more than Japan uses to power its entire economy. A smart, distributed power grid that can more efficiently aggregate and route electricity—especially green electricity—would result in significant increases in energy efficiency. Moreover, a study done by the US government’s Lawrence Berkeley National Laboratory reports that current off-the-shelf waste-to-energy and other recycled energy systems could harness sufficient waste heat from just our industrial plants to produce 20 percent of our current electricity consumption.
What if we were to factor in the energy efficiency gains in using hydrogen and other storage mediums for renewable energies and the gains in transitioning the transport fleet from the very inefficient, oil-powered internal combustion engine to super-efficient, electric plug-in and hydrogen-powered vehicles? The potential uptake in thermodynamic efficiency across the supply chain and in every sector of society in the emerging Third Industrial Revolution should result in productivity gains far in excess of what we were able to achieve over the course of the Second Industrial Revolution in the twentieth century.
Nothing is more sacrosanct to an economist than property relations. Classical economic theory is wedded to property exchange in markets as the most efficient means of generating economic activity and producing prosperity. This core feature of capitalism brings with it several operating assumptions that are often regarded as inherent in human nature, but upon reflection, they are merely social constructs that reinforce a particular way of organizing economic activity that is characteristic of the modern era.
Recall John Locke’s belief that private property is a natural right. Locke wrote,
whatsoever, then, [man] removes out of the state that nature hath provided and left it in, he hath mixed his labor with it, and joined to it something that is his own, and thereby makes it his property. It being by him removed from the common state nature placed it in, it hath by this labor something annexed to it that excludes the common right of other men. For this “labor” being the unquestionable property of the laborer, no man but he can have a right to what that is once joined to, at least where there is enough, and as good left in common for others.22
Never mind that for most of human history, our species lived communally as foragers and hunters and consumed nature’s bounty as quickly as we appropriated it. The idea of property, in the form of stored surplus grain and domesticated animals, had to await the agricultural era, which didn’t commence until 10,000 BC. Paleolithic life was nomadic and followed the changing seasons. The only possessions were the limited attire, ornaments, hand tools, and weapons that could be carried on one’s back, and they were regarded as belonging to the community as a whole.
Even with the advent of agriculture, the idea of property was more of a communal concept than an individual possession. Although private property existed, especially with the emergence of the great hydraulic civilizations, its role was limited in scope to the fortunes of kings and traders. As late as the fourteenth century in Europe, lords and serfs belonged to the land, rather than the land belonging to the people. In the Christian schemata, God ruled over the whole of his creation and merely entrusted it to his emissaries on Earth, the Church, who oversaw its stewardship in a descending ladder of trusteeship that reached down from the lords of the feudal estates to the knights, vassals, and serfs in what theologians described as “The Great Chain of Being.” The concept of selling and buying land—real estate—didn’t take hold until the passage of the great Enclosure Acts in Tudor and Elizabethan England, marking the very end of the feudal economy and the dawn of the market era.
The merchant guilds in the free cities of late medieval Europe also had a limited idea about acquisition of property. They fixed the price and quantity of their production to merely reproduce their way of life, without the intention of acquiring property in excess of what they needed to preserve a steady state of existence.
The First Industrial Revolution quickened the production of goods beyond that of any previous period of history, allowing artisans and laborers to live better than the royalty of just a few centuries earlier. Caught up in the elation, Enlightenment economists began to extol the innate virtues of private property relations in the marketplace, and came to see the acquisition of property as an inherent biological drive, rather than a social proclivity conditioned by a specific communication/energy paradigm.
The market mechanism became the “invisible hand” to regulate the supply and demand of private property and to assure that its distribution was as impartial as the laws of Newtonian physics that governed the universe. The pursuit of self-interest—also regarded as an innate quality of human nature—would guarantee a steady advance of the general welfare and move humankind along the road to unlimited progress. Concepts like “caveat emptor”—let the buyer beware—and “buy cheap and sell dear” created the context for a new, binary social reality, separating the world into “mine” versus “thine.”
The emergent Third Industrial Revolution, however, brings with it a very different conception of human drives, and the assumptions that govern human economic activity. The distributed and collaborative nature of the new economic paradigm is forcing a fundamental rethinking of the high regard previously bestowed on private property relations in markets.
The quickening connection of the nervous system of every human being to every other human being on Earth, via the Internet and other new communications technologies, is propelling us into a global social space and a new simultaneous field of time. The result is that access to vast global networks is becoming as important a value as private property rights were in the nineteenth and twentieth centuries.
A generation growing up on the Internet is apparently unmindful of the classical economic theorists’ aversion to sharing creativity, knowledge and expertise, and even goods and services in open commons to advance the common good. The classical economists would regard such economic arrangements as inimical to human nature and doomed to fail for the simple reason that human beings are primarily selfish, competitive, and predatory, and would either take advantage of the goodwill and naïveté of their peers, and freeload on the contribution of others, or would go it alone with a far better payoff.
These misgivings seem to have had little impact. Today, hundreds of millions of young people are actively engaged in distributed and collaborative social networks on the Internet, willingly giving their own time and expertise, mostly for free, to advance the good of others. Why do they do it? For the sheer joy of sharing their lives with others in the belief that contributing to the well-being of the whole does not in any way diminish what’s theirs but, rather, increases their well-being manyfold.
Social spaces like Wikipedia and Facebook challenge the very basis of classic economic theory, that human beings are selfish creatures, continuously in pursuit of an autonomous existence. Third Industrial Revolution communications and energies bring out a far different set of biological drives—the need for sociability and the quest for community.
Nowhere is this shift in thinking better reflected than in our changing attitudes about property. In the new era, the notion of property, which placed a premium on acquisition of material things in markets and the right to exclude others from their enjoyment, is giving way to a new concept of property as the right to enjoy access in social networks and share common experiences with others. Our ideas about property are so wedded to the traditional notion of ownership and exclusion that it’s hard to imagine that there is an older property right individuals enjoyed over the centuries—the right of access to property held in common. For example, the right to navigate rivers, forage in local forests, walk on country lanes, fish in nearby streams, and congregate on the public square. This older idea of property as the right of access and inclusion was increasingly shunted aside in the modern era as market relations came to dominate life and private property came to define the “measure of a man.”
In a distributed and collaborative economy, however, the right of access to global social networks becomes as important as the right to hold on to private property in national markets. That’s because quality-of-life values become more important, especially the pursuit of social inclusion with millions of others in global communities in virtual space. Thus, the right to Internet access becomes a powerful new property value in an interconnected world.
Google’s decision in 2010 to refuse to let the Chinese government censor information on its search engine is part of a dramatic confrontation unfolding in international relations. The showdown began with Secretary of State Hillary Clinton’s speech attacking China and other nations for blocking access to parts of Google and other Internet search engines and websites. Clinton warned that “a new information curtain is descending across much of the world” and made it clear that “the U.S. stand[s] for a single Internet where all of humanity has equal access to knowledge and ideas.”23 The Google standoff with China marks a seismic shift from conventional geopolitics, which has governed the affairs of nations from the very beginning of the market economy, to emergent biosphere politics that will increasingly determine the fate of civilization in the global networked economy.
The new conflicts in the biosphere era will increasingly center around access rights. The change reflects the diminishing importance of ownership relative to access in a globally connected and interdependent world.
Young people living in China and other restrictive, authoritarian regimes are struggling to secure the right to access social spaces on global networks with the same fervor that brought young people to the barricades in the eighteenth and nineteenth centuries in the pursuit of property rights. The Global Internet Freedom Consortium is made up of firewall-busting firms that have created software that breaks through the elaborate systems set up by nations like Egypt, Iran, Libya, Vietnam, Saudi Arabia, and Syria to prevent their populations from getting access to global information networks.24 Millions of captive people have been able to connect to the global Internet community, for brief moments of time, giving them hope that someday they might enjoy the same right to universal access that so many young people in the developed democracies take for granted.
The power of social media to break down authoritarian rule came into stark relief in Egypt in January and February 2011, when hundreds of thousands of young people defied Hosni Mubarak’s brutal control over the country by taking to the streets for eighteen days and bringing the country to a standstill. The youth-led rebellion, symbolized by young Google executive Wael Ghonim, who became their “leaderless” spokesperson, used social media—Facebook, YouTube, and Twitter—to outflank and outmaneuver the state police and military, and eventually bring down one of the most dictatorial governments in the world.
Youth-led street demonstrations using social media also broke out in Tunisia, Libya, Yemen, Jordan, Bahrain, and across the Arab region. The Internet generation is demanding an end to autocratic, centralized governance so they can live in an open, transparent, borderless world that reflects the operating norms and practices of the new social media that has come to define the aspirations of youth everywhere.
The uproar among youth living in authoritarian countries will only grow more intense in the years ahead, as they demand their right to be part of a global family that is beginning to share knowledge, commerce, and social life across national boundaries. The Internet has made the biosphere the new political boundary and, in the process, has made traditional geo-politics appear more like an anachronism.
In a lateral world, even intellectual property, a stalwart feature of capitalism, is unraveling and becoming increasingly marginalized in the commercial arena. Because “information likes to run free” in an Internet world, copyrights and patents are increasingly being ignored or bypassed. When more of the commercial and social life of society is conducted in open-source commons, intellectual property becomes, for all intents and purposes, an outmoded and useless convention. The music companies were the first to feel the full brunt of open-source copyrighted material. When millions of young people began to freely share music with one another online, the companies attempted to protect copyrights by bringing lawsuits against offending music pirates and creating firewalls with new encryption technology—all to little avail.
Book publishers and authors are increasingly making entire chapters of new, copyrighted books available for free on the Internet, hoping readers will be sufficiently interested to purchase the books. The odds are not good. Since there is such voluminous information circulating free on the Internet on every conceivable subject, with new information streaming in with every passing moment, any effort to impose copyright and exact a fee for securing material is likely to be difficult, if not futile. The same goes for newspapers. The younger generation no longer buys daily newspapers and weekly magazines, preferring to log on and access free blog sites like the Huffington Post to stay informed. Many of the leading newspapers and magazines have attempted to slow the stampede to free information by making their own content available online, for free, hoping that advertisers will pay for ads on their websites.
For twenty-five years life science companies have been rushing to patent human, animal, and plant genes in an effort to monopolize the genetic blueprints of life on Earth and reap vast commercial gains in fields including agriculture, energy, and medicine. In recent years, however, in the hopes of establishing a more transparent and collaborative approach to scientific research, a younger generation of scientists have countered by making new genetic discoveries freely available on open-source genetic commons on the Internet to encourage the sharing of biological knowledge. It’s unlikely that copyrights and patents will survive in their present form in a collaborative, open-source world where the right to universal access trumps the right to exclusive ownership.
Similarly, the right of free and open access to the renewable energies that bathe the Earth—the sun, wind, geothermal heat, ocean waves and tides, and so on—is increasingly becoming a rallying cry of a younger generation committed to sustainable lifestyles and stewardship of the biosphere. The conventional ownership and control of fossil fuel energy in the hands of a few giant corporations and governments, which characterized the First and Second Industrial Revolutions, will appear odd to young people in 2050, who grew up in the TIR economy and assumed that the Earth’s energy is a public good—like the air we breathe—to be shared by all of humanity.
Ensuring universal access and guaranteeing every human being on Earth the right to be included in the life of the global commons opens the door to a vast potential extension of human sociability. The individual and collective struggle to secure access rights in the future will likely be as significant as was the struggle to secure property rights in the past.
Wealth, productivity, balanced budgets, and property rights are not the only features of classical economic theory being rethought. Even the central tenet of capitalism itself is beginning to wobble as a result of the lateral economic opportunities made possible by TIR technologies.
Capitalism was founded on the idea that the accumulation of individual wealth could be harnessed in the form of financial capital to expropriate even more wealth by controlling the technical means by which that wealth is generated and the logistical means by which it is distributed.
The fossil fuel–based industrial revolution required huge up-front costs. Coal-fired steam technology was far more expensive than wood fuel or water and windmill technology. The high costs of the new energies and technologies and the specialization of tasks and skills that went with them favored centralized management and production under a single roof in what would later be called a factory system.
The textile industry in England was the first to be transformed into the new model. Other cottage industries soon followed. A new class of wealthy merchants garnered sufficient financial capital to own the tools of production, which were previously owned by the craftsmen themselves. They were called capitalists. Unable to compete with the economies of scale and speed of the new factory enterprises, craftsmen lost their independence and became hired hands in the factories, and the workforce of the industrial revolution. Historian Maurice Dobb sums up the significance in the shift from craft to industrial production and from cottage industries to capitalist enterprises: “The subordination of production to capital, and the appearance of the class relationship between capitalist and the producers is, therefore, to be regarded as the critical watershed between the old mode of production and the new.”25
In the new, distributed, and collaborative communication and energy spaces of the Third Industrial Revolution, however, the accumulation of social capital becomes as important and valuable as the accumulation of financial capital. That’s because the cost of entering into networks is plummeting as communication technologies become cheaper. Today, nearly two billion people armed with a cheap desktop computer or an Internet-accessible cell phone enjoy access to one another at the speed of light, with more distributed power at their disposal than the global TV networks.26 Soon, the plunging cost of renewable energy technology will provide every human being with comparable access to energy across distributed energy networks.
The extraordinary capital costs of owning giant centralized telephone, radio, and television communications technology and fossil fuel and nuclear power plants in markets is giving way to the new, distributed capitalism, in which the low entry costs in lateral networks make it possible for virtually everyone to become a potential entrepreneur and collaborator in open Internet and intergrid commons. The upshot is that financial capital is often not as important as social capital, at least at the start-up stage, in the creation of new mega enterprises. Witness twentysomething young men creating Google, Facebook, and other global networks, literally in their college dorm rooms.
It is not that financial capital is no longer relevant. It is. But the way it is used has been fundamentally altered. As the economy flattens and becomes more distributed, favoring peer-to-peer relationships rather than autonomous exchanges, the very nature of how companies derive revenue changes. The production of property for exchange, the very cornerstone of capitalism, becomes increasingly unprofitable in an intelligent economy where exchange costs become cheaper and cheaper, and eventually, virtually free. That process is well under way and will only accelerate in coming decades as the TIR infrastructure matures. As this happens, property exchange in markets will give way to access relationships in collaborative networks, and production for sale will be subsumed by production for just-in-time use. New York Times reporter Mark Levine described the new mindset with the astute observation that “sharing is to ownership what the iPod is to the eight track, what the solar panel is to the coal mine. Sharing is clean, crisp, urbane, postmodern: owning is dull, selfish, timid, backward.”27 What I am describing is a fundamental change in the way capitalism functions that is now unfolding across the traditional manufacturing and retail sectors and reshaping how companies conduct business.
In conventional, capitalist markets, profit is made at the margins of transaction costs. That is, at every step of the conversion process along the value chain the seller is marking up the cost to the buyer to realize a profit. The final price of the good or service to the end user reflects the markups.
But TIR information and communication technologies dramatically shrink transaction costs across the supply chain in every industry and sector, and distributed renewable energies will soon do so as well. The new, green energy industries are improving performance and reducing costs at an ever-accelerating rate. And just as the generation and distribution of information is becoming nearly free, renewable energies will also. The sun and wind are available to everyone and are never used up.
When the transaction costs for engaging in the new Third Industrial Revolution communications/energy system approach zero, it is no longer possible to maintain a margin, and the very notion of profit has to be re-thought. That’s already happening with the communications component of the Third Industrial Revolution. The shrinking of transaction costs in the music business and publishing field with the emergence of music downloads, ebooks, and news blogs is wreaking havoc on these traditional industries. We can expect similar disruptive impacts with green energy, 3D manufacturing and other sectors. So how do businesses make profit when transaction costs shrink and margins disappear?
In a near transaction-free economy, property still exists, but remains in the hands of the producer and is accessed by the consumer over a period of time. Why would anyone want to own anything in a world of continuous upgrades, where new product lines sweep in and out of the market in an instant? In a Third Industrial Revolution economy, time becomes the scarce commodity and the key unit of exchange, and access to services supersedes ownership as the primary commercial drive.
Purchasing CDs has quickly given way to subscriptions in the past decade. Companies like Rhapsody and Napster allow subscribers to access their music library and download their favorite recordings over a month or year.
Ownership of cars, once considered a rite of passage into the adult world of property relationships, has increasingly lost ground to leasing arrangements. Automobile companies like GM, Daimler, and Toyota would rather keep the vehicles and enter into a long-term service relationship with their customers. This way, the user is paying for the driving experience twenty-four hours a day over the period covered by the lease. The auto company gains a captive client and the user enjoys the convenience of mobility and the easy changeover to a new vehicle every two to three years, while leaving the burden of service and repair to the dealer.
Vacation time-shares have also become a hot business model. Rather than buying a second home, millions of vacationers now buy time-shares in vacation property, giving them the right of access to the accommodations for a specific duration of time. They can also use time-share points to access accommodations in thousands of vacation homes around the world.
Still more interesting, in a world where access begins to eclipse ownership and property remains in the hand of the supplier, to be lent out in time segments to users in the form of leases, rentals, time-shares, retainers and other temporal arrangements, the notion of sustainability becomes intimately attached to the bottom line, rather than simply being a socially responsible act of conscience on behalf of enlightened management.
When an automobile remains the property of the automaker from cradle to grave, the company has a vested interest in making a vehicle that is durable, with low maintenance costs, and that is made of material that is easily recyclable, with a low-carbon footprint. When hotels like Starwood build and own time-share properties, they have an interest in using the least amount of energy and the most sustainable resources to provide a quality experience for their time-share users.
The shift from sellers and buyers to suppliers and users, and from exchange of ownership in markets to access to services in time segments in networks is changing the way we think about economic theory and practice. At an even deeper level, however, the emerging TIR energy-communication infrastructure is changing the very way we measure economic success.
The Third Industrial Revolution changes our sense of relationship to and responsibility for our fellow human beings. We come to see our common lot. Sharing the renewable energies of the Earth in collaborative commons that span entire continents can’t help but create a new sense of species identity. This dawning awareness of interconnectivity and biosphere embeddedness is already giving birth to a new dream of quality of life, especially among the youth of the world.
The American dream, long held as the gold standard for aspiring people everywhere, is squarely ensconced in the Enlightenment tradition, with its emphasis on the pursuit of material self-interest, autonomy, and independence. Quality of life, however, speaks to a new vision of the future—one based on collaborative interest, connectivity, and interdependence. We come to realize that true freedom is not found in being unbeholden to others and an island to oneself but, rather, in deep participation with others. If freedom is the optimization of one’s life, it is measured in the richness and diversity of one’s experiences and the strength of one’s social bonds. A more solitary existence is a life less lived.
The dream of quality of life can only be collectively experienced. It is impossible to enjoy a quality of life in isolation and by excluding others. Achieving a quality of life requires active participation by everyone in the life of the community and a deep sense of responsibility by every member to ensure that no one is left behind.
Enlightenment economists were convinced that happiness and “the good life” were synonymous with the accumulation of personal wealth. A younger generation, at the cusp of the Third Industrial Revolution, however, is just as likely to believe that, while economic comfort is essential, one’s happiness is also proportional to the accumulation of social capital.
The change in thinking about the meaning of happiness is beginning to affect one of the key indices for measuring economic prosperity. The gross domestic product (GDP) was created in the 1930s to measure the value of the sum total of economic goods and services generated over a single year. The problem with the index is that it counts negative as well as positive economic activity. If a country invests large sums of money in armaments, builds prisons, expands police security, and has to clean up polluted environments and the like, it’s included in the GDP.
Simon Kuznets, an American who invented the GDP measurement tool, pointed out early on that “[t]he welfare of a nation can . . . scarcely be inferred from a measurement of national income.”28 Later in life, Kuznets became even more emphatic about the drawbacks of relying on the GDP as a gauge of economic prosperity. He warned that “[d]istinctions must be kept in mind between quantity and quality of growth . . . . Goals for ‘more’ growth should specify more growth of what and for what.”29
In recent years, economists have begun to create alternative indices for measuring economic prosperity based on quality-of-life indicators rather than mere gross economic output. The Index of Sustainable Economic Welfare (ISEW), the Fordham Index of Social Health (FISH), the Genuine Progress Indicator (GPI), The Index of Economic Well-Being (IEWB), and the UN’s Human Development Index (HDI) are among the many new quality-of-life economic index models. These new indices measure the general improvement in the well-being of society and include things such as infant mortality, longevity of life, the availability of health coverage, the level of educational attainment, average weekly earnings, the eradication of poverty, income inequality, affordability of housing, the cleanliness of the environment, biodiversity, the decrease in crime, the amount of leisure time, and so on. The governments of France, the United Kingdom, as well as the European Union and the OECD have created formal quality-of-life indexes with the expectation of increasingly relying on these new measurements to judge the overall performance of the economy.
If quality of life requires a shared notion of our collective responsibility for the larger community in which we dwell, the question becomes, where does that community end? In the new era, our spatial and temporal orientation moves beyond arbitrary political boundaries to encompass the biosphere itself.
Enlightenment economists’ determination to ground their new theories in the verities of Newtonian mechanics led them to conceive of space and time in a very mechanical and utilitarian fashion. Space was viewed as a container—a storehouse—full of useful resources ready to be appropriated for economic ends. Time, in turn, was a malleable instrument that could be manipulated to speed the expropriation process and create unlimited economic wealth. Human agency was regarded as an external force that acted on the resources scattered across space, transforming them as efficiently as possible, with labor-saving technologies, into productive utilities. The utilitarian approach to space and the efficient use of time became the critical spatial and temporal coordinates of classical economic theory.
The Enlightenment and post-Enlightenment assumptions about space, time, and human agency reflected the thinking of the day. Geologists and chemists believed that the inanimate material of the Earth existed as a kind of timeless, passive reservoir of untapped stock that awaited human activation to set it in motion and transfer it into productive wealth. Now, new scientific discoveries about the workings of the Earth, especially the interaction between geochemical processes and living systems, cast doubt on this last remaining vestige of classical economic thinking.
We touched on the working of the biosphere in earlier chapters. In the 1970s, British scientist James Lovelock and American biologist Lynn Margulis elaborated on the way geochemical processes interact with biological processes on Earth to maintain the ideal conditions for sustaining life on the planet. Their provocative Gaia hypothesis has gained increasing support over the ensuing decades as researchers from a wide range of scientific fields have weighed in, adding additional evidence to bolster Lovelock and Margulis’ theory.
Lovelock and Margulis observe that the Earth is a self-regulating system that acts much like a living system. They cite the example of oxygen and methane regulation to make their case. Oxygen levels on the planet have to remain within a very tight range for life to survive. If oxygen levels increase beyond that range, the Earth would erupt in a fireball and terrestrial life would be extinguished. So how does oxygen get regulated?
The two scientists believe that when oxygen in the atmosphere reaches above acceptable levels, it triggers an increase in the production and release of methane from microscopic bacteria. The methane migrates into the atmosphere, where it dampens the oxygen content until it falls back within its proper range. This is but one of countless feedback loops that keep the biosphere a hospitable place for the flourishing of life on Earth.
The new understanding of the workings of feedback loops in ecological networks is paralleled in the modeling of info-energy feedback networks in an emerging Third Industrial Revolution economy. If technology, like art, imitates life, the new networked infrastructure of the TIR economy comes more and more to imitate the workings of the natural ecosystems of the planet. Creating economic, social, and political relationships that mimic the biological relationships of the ecosystems of the Earth is a critical first step in re-embedding our species into the fabric of the larger communities of life in which we dwell.
A new scientific worldview is emerging whose premises and assumptions are more compatible with the network ways of thinking that underlie a Third Industrial Revolution economic model. The old science views nature as objects; the new science views nature as relationships. The old science is characterized by detachment, expropriation, dissection, and reduction; the new science is characterized by engagement, replenishment, integration, and holism. The old science is committed to making nature productive; the new science to making nature sustainable. The old science seeks power over nature; the new science seeks partnership with nature. The old science puts a premium on autonomy from nature; the new science, on participation with nature.
The new science takes us from a colonial vision of nature as an enemy to pillage and enslave, to a new vision of nature as a community to nurture. The right to exploit, harness, and own nature in the form of property is tempered by the obligation to steward nature and treat it with dignity and respect. The utility value of nature is slowly giving way to the intrinsic value of nature.
If all biological organisms are continuously interacting with geochemical processes to maintain a homeostatic condition favorable to the perpetuation of the biosphere and preservation of life on Earth, then securing the long-term well-being of the human species depends on our ability to live in the spatial and temporal restraints under which the Earth functions. Classical and neoclassical economic theory and practice, with their mania for expropriation and consumption, have undermined the feedback mechanisms between the Earth’s geochemical and biological processes, impoverished the planet’s ecosystems, and led to a dramatic shift in the temperature and climate on Earth.
If we are to survive and prosper as a species, we will need to rethink our concepts of space and time. The classical economic definition of space as a container or storehouse of passive resources will need to give way to the idea of space as a community of active relationships. In the new schema, the geochemical makeup of the Earth is not viewed as a resource or property but, rather, an intricate part of the interactive relationships that sustain life on the planet. That being the case, our economic priorities need to shift from productivity to generativity, and from a purely utilitarian pursuit of nature, to stewarding the relationships that maintain the biosphere.
Similarly, efficiency needs to make room for sustainability in the organization of time. Our very approach to engineering has to be recalibrated to synchronize with the regenerative periodicities of nature rather than simply the productive rhythms of market efficiency.
The shift from productivity to generativity and from efficiency to sustainability places our species back in step with the ebbs and flows, rhythms, and periodicities, of the larger biosphere community of which we are an intricate and indivisible part. This is what the Third Industrial Revolution is really all about and why existing economic theory, as taught in the business schools of the world, is inadequate as a frame of reference for navigating the new economic era and creating biosphere consciousness.
For the skeptics who argue that any attempt to embed human economic activity in the rhythms and periodicities of the biosphere is futile because it conflicts with our biological predisposition to secure autonomy and exercise power over nature from a distance, a quick remedial introduction to chronobiology ought to put any such reservations to rest.
All life forms, from microbes to human beings, are made up of myriad biological clocks that entrain their physiological processes to the larger rhythms of the biosphere and the planet. Living creatures, including human beings, time their internal and external functions with the solar day (circadian rhythms), the lunar month (lunar rhythms), the changing seasons and the annual rotation of the Earth around the sun (circannual rhythms). Psychologist John E. Orme notes that “the physical universe is basically rhythmic in nature. The moon revolves around the earth, the earth around the sun, and the solar system itself changes spatial position in time. All these phenomena result in regular rhythmic changes and the survival of biological species depends on the capacity to follow these rhythms.”30
Anyone who has ever experienced jet lag from quickly crossing time zones in an airplane understands that the human body is delicately calibrated and choreographed to the rhythms of the planet, and that any disruption throws the body’s internal processes into desynchronization. Our body temperature rises and falls in a predictable pattern every twenty-four hours. So, too, does our skin temperature. Women’s menstruation cycles tend to follow a lunar cycle. Seasonal Affective Disorder (SAD) generally occurs in the winter months, when sunlight is shortest in duration, and the feeling of lethargy and depression mimics the hibernation process that slows physiological activity among many mammalian species.31
Researchers in the field of chronopharmacology are beginning to realize that the time of day a particular medication is given or surgery is performed can influence its effectiveness and are beginning to synchronize treatment to an individual’s internal biological clocks.
The fact that human beings, like every other species, are biologically entrained to the periodicities of the Earth changes the way we think about space and time. Our very being is woven into the spatial and temporal coordinates of the Earth. Cells in our physical body are continuously being replaced with each passing moment. Our existence is a pattern of activity, with low-entropy calories of energy flowing into our body from nature, replenishing cells as quickly as they are discarded back to the environment for recycling. We are each an embodiment of the energy currents and the geochemical and biological processes that flow through the biosphere. In the planetary system, life, geochemical processes, and the Earth’s periodicities interact in a tightly choreographed set of relationships that assures the functioning of each creature and the biosphere as a whole.
For most of history, our species lived in sync with the rhythms of the planet. The stored fossil fuel energies of the First and Second Industrial Revolutions removed the human race from the periodicities of the Earth for the first time. Today, 24/7 electricity illumination, round-the-clock Internet communication, jet travel, shift work, and a myriad of other activities have dislodged us from our primordial biological clocks. The sun and the changing seasons have become far less relevant to our survival—or at least we thought that was the case. Our increasing reliance on a rich deposit of inert stored sun, in the form of carbon-based fuels, created the illusion that our success on Earth was more dependent on human ingenuity and technological prowess than on nature’s recurring cycles. We now know that’s not so. The imposition of artificial production rhythms—especially the institutionalization of machine efficiency—has brought great material wealth to a significant portion of the human race, but at the expense of compromising the Earth’s ecosystems, with dreadful consequences for the stability of the Earth’s biosphere.
The Third Industrial Revolution brings us back into the sunlight. By relying on the energy flows that cross the Earth’s biosphere—the sun, wind, the hydrological cycle, biomass, geothermal heat, and the ocean waves and tides—we reconnect to the rhythms and periodicities of the planet. We become re-embedded in the ecosystems of the biosphere and come to understand that our individual ecological footprint effects the well-being of every other human being and every other creature on Earth.
WHETHER IT’S RETHINKING GDP and how to measure the economic well-being of society, revising our ideas about productivity, understanding the notion of debt and how best to balance our production and consumption budgets with nature’s own, reexamining our notions about property relations, reevaluating the importance of finance capital versus social capital, reassessing the economic value of markets versus networks, changing our conception of space and time, or reconsidering how the Earth’s biosphere functions, standard economic theory comes up woefully short.
On these and other accounts, the changes taking place in the way we understand human nature and the meaning of the human journey are so profoundly disruptive to the way we have thought over the past two hundred years that spawned the first two industrial revolutions, that it is likely that much of classical and neoclassical economic theory that accompanied and legitimized these two earlier industrial eras will not survive the newly emerging economic paradigm.
What is likely to happen is that the still-valuable insights and content of standard economic theory will be rethought and reworked within the purview of a thermodynamic lens. Using the laws of energy as a common language will allow economists to enter into a deep conversation with engineers, chemists, ecologists, biologists, architects, and urban planners, among others, whose disciplines are grounded in the laws of energy. Since these other fields are the ones that actually produce economic activity, a serious interdisciplinary discussion over time could potentially lead to a new synthesis between economic theory and commercial practice and the emergence of a new, explanatory economic model to accompany the Third Industrial Revolution paradigm.
Economics is not the only academic discipline that will need to be transformed. Our public educational system, like our economic theory, has not changed much since its inception at the beginning of the modern market era. Like classical and neoclassical economic theory, it, too, has been a handmaiden for the First and Second Industrial Revolutions, mirroring the operating assumptions, policies, and practices of the commercial order it served.
Now, the shift from a centralized Second Industrial Revolution to a lateral Third Industrial Revolution is forcing a makeover of the educational system. Rethinking the framing concepts that govern education and the pedagogy that accompanies them will not be easy. Teachers around the world are only just now beginning to restructure the educational experience to make it relevant to young people who will need to learn how to live in a distributed and collaborative economy tucked inside a biosphere world.