Political Bubbles

November 12, 2014

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Nolan McCarty, Keith T. Poole and Howard Rosenthal. Political Bubbles: Financial Crises and the Failure of American Democracy. 2013. Princeton: Princeton University Press.

This book is an indictment of the American political system, not for causing financial crises, but for making them worse through political action or inaction. In the authors’ view, financial bubbles have been accompanied by “political bubbles.”

Financial bubbles occur when the prices of financial assets rise far beyond their “fundamental” value, the value that could be justified by some rational economic analysis. They are driven by excessive optimism, or by the desire to encourage and profit from the optimism of others. In the case of the housing bubble, the overvalued assets were risky subprime mortgages and the complicated financial instruments that were based on them.

A political bubble is a “set of policy biases that foster and amplify the market behaviors that generate financial crises….Rather than tilting against risky behavior, the political bubble aids, abets, and amplifies it.” The authors identify three channels through which this political amplification of financial bubbles occurs: the three I’s of ideology, interests, and institutions.

 Ideology

The authors see an ideology as a belief system whose rigidity “inhibits the rational adaptation of policy to the circumstances of financial crisis.” Ideologues hold to their policy positions even when the results are unfortunate. The ideology of free-market conservatism is most conducive to financial bubbles, but other ideologies play a role. The egalitarian belief system more common on the political left supported efforts to broaden home ownership by making mortgage loans to lower-income buyers. This gave political cover to predatory lenders, who could claim to be promoting the public interest with tricky subprime and adjustable rate mortgages.

The authors use a spatial model of Congressional voting that places each issue and each legislator along a single dimension from liberal to conservative. The model is remarkably successful in predicting how most legislators will vote on most issues, accounting for over 90% of votes cast in the most recent Congresses. By calculating and comparing the average ideological scores of each major party over time, the authors conclude that ideological polarization is at an all-time high. This has occurred primarily because the Republican Party has moved more to the right. To put this in historical context, polarization has risen and fallen in tandem with economic inequality, the last peak having been reached in the Gilded Age. The authors see a reciprocal relationship between economic excess and political polarization:

In periods in which there are huge economic rewards to unfettered markets, support for free market conservatism increases–especially among those individuals and groups who benefit the most….Political polarization leads to political gridlock that makes economic reform difficult. Not only can the economic losers not form a coalition to redirect the allocation of resources, but the government cannot effectively respond to those economic shocks and crises which in turn further increases polarization.

I think that’s a pretty good summary of our political impasse.

Interests

Looking beyond legislators to those who influence them, individuals and organizations who are profiting the most from financial bubbles have strong motives to support policies that sustain those bubbles. As the financial services industry expanded and thrived in the bubble years, it also gained political power. “Campaign contributions from the financial sector increased almost threefold between 1992 and 2008, even after adjusting for inflation,” making it by far the largest source of contributions to political campaigns.

The book also cites the work of Larry Bartels, who demonstrated that actual legislative votes correspond most to the desires of high-income constituents, and hardly at all to those with low incomes.

Powerful financial interests influence politicians with information as well as money. Complex financial issues are often challenging for individual legislators to understand, and corporate lobbyists are only too happy to “help” them.

The interests of politicians easily come to overlap the interests of their most powerful constituents. Many have been rewarded for their pro-business policies with high-level positions in the very businesses those policies help.

Institutions

A variety of institutional arrangements make the American democratic system very sluggish in its response to financial crises. “The problem is that political power in the United States is so fragmented, separated, and checked that policy change requires extraordinary consensus and mobilization.”

For example, we elect our Congressional representatives with frequent elections conducted in rather small legislative districts. That can make representatives less responsive to national needs than to the demands of local constituents, especially the richest and best organized. In the Senate, permissive filibuster rules effectively require a 60-vote majority just to bring a bill to a vote.

Financial regulators suffer from a “low regulatory capacity.” They lack the resources and expertise to keep up with the growing and complexifying financial sector. Often they end up relying on the industry they regulate for information, talent and expertise, making them vulnerable to “capture” by that industry.

The political bubble in the recent financial crisis

In the period leading up to the financial crisis of 2008, ideology, interests and institutions combined to amplify rather than counter the growing financial bubble:

The lethal concoction that destroyed the investor society and the broader standard of living had five components— all rooted in our Three I’s. The first was deregulation that permitted innovative new financial instruments, such as exotic mortgage products, collateralized debt obligation tranches, and credit default swaps to emerge without meaningful regulation. The second was deregulation that permitted financial firms to engage in a riskier range of activities. The third was a reduction in the monitoring capacity of regulators, either through deliberate neglect, as reflected in the tenures of Alan Greenspan at the Federal Reserve and Harvey Pitt and Christopher Cox at the Securities and Exchange Commission (SEC), or as a result of the failure of staffing and budgets to expand at the same rate as the markets they were supposed to regulate. The fourth was the shifts in competition policy that allowed the creation of financial institutions that were too big (and too politically powerful) to fail. The fifth component was the privatization of government financing of mortgages through Fannie and Freddie, which created two additional too-big-to-fail institutions.

Financial deregulation took place during a period of three decades, heavily driven by ideology and interests. In the early 1980s, federal law deregulated interest rates, overriding state usury laws and allowing adjustable rate mortgages. These “quickly got distorted into ‘teaser’ loans with low introductory interest rates that later reset to usurious levels.” Exorbitant interest rates made it increasingly profitable to lend money even to people with a high risk of being unable to repay the principal. Complex financial derivatives whose value depended on subprime loans were exempted from regulation in 2000. Once these deregulations had occurred, institutional limitations combined with ideology and interests to block reform. All of the numerous attempts in Congress to curb predatory lending failed.

A number of forces came together to support risky lending as a way of encouraging home ownership. Free market conservatism generally opposed financial regulation. In addition, Republican administrations were anxious to promote the “ownership society,” in which more people could build private wealth instead of relying on government. For most people, wages were stagnant, but they could build wealth anyway if they could obtain a mortgage loan and leverage a small down payment into some growing equity. Bill Clinton and other Democrats also promoted home loans to broaden the middle class and create a more egalitarian society. So an expansion of home loans had much more bipartisan support than direct housing subsidies to low-income households, which would cost the taxpayers money.

Implementing the federal role in expanding home ownership was largely the responsibility of two “Government-Sponsored Enterprises” (GSEs), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Both entities helped finance home ownership by buying qualifying mortgages from lenders. “Lenders in turn used the proceeds of these sales to issue more mortgages, which lowered borrowing costs and stimulated housing demand. The subsidy embedded in Fannie and Freddie was enhanced by the ultimately correct perception that the government guaranteed their debt. This guarantee reduced their borrowing costs below those other corporate borrowers.” Congressional legislation under both Republican and Democratic administrations encouraged the GSEs to back more mortgages for lower-income households. Even if the mortgages they backed were fairly safe, the additional capital enabled private lenders to make shakier loans and sell them off to unsuspecting investors. The authors are certainly not endorsing the view that the financial crisis was all the government’s fault; they regard that as an ideological position appealing to those who think that free markets can do no wrong. They are only showing how political factors helped inflate the financial bubble.

In the end, this way of creating an “ownership society” was a colossal failure. Rates of home ownership peaked and then crashed, especially for the ethnic minorities who had the lowest rates to begin with. Free-market ideology, sprinkled with a few liberal good intentions and a lot of money in politics, amplified the worst financial crisis since the Great Depression.

Continued

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The New Geography of Jobs (part 2)

October 17, 2014

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Enrico Moretti makes a good case that where a worker lives still matters, and that job opportunities are unevenly distributed across metropolitan areas of the United States. The best jobs in the innovation sector of the economy are to be found primarily in a small number of thriving metropolitan areas.

I find Moretti less convincing when he addresses more general economic questions, such as how many good jobs the new economy can create. He presents a rather rosy view of job creation that would be contested by other authors.

How much opportunity?

Moretti cites the spectacular growth rates of certain kinds of jobs, such as in software, scientific research and development, and pharmaceuticals. But even in these areas, the absolute numbers of jobs are not as impressive as the growth curves (which tend to rise steeply when they are starting from close to zero). Moretti says that the innovation sector can be the main engine of economic growth without providing a majority of the jobs, but one would still like to know how much it can grow beyond its estimated 10% of jobs today, considering that manufacturing jobs used to employ 30% of the labor force.

Moretti asserts that “2.6 jobs are typically created for every one destroyed,” but he doesn’t suggest a time frame for that process or explain why job creation has been so sluggish and unemployment so high during this particular transition.

Consistent with his rosy view of job creation, Moretti regards the concentration of good jobs in certain metropolitan areas as a temporary state of affairs:

Just like people, industries have life cycles. When they are infants, they tend to be dispersed among many small producers spread all over the map. During their formative years, when they are young and at the peak of their innovative potential, they tend to concentrate to harness the power of clusters. When they are old and their products become mature, they tend to disperse again and locate where costs are low. Thus it is not surprising that the innovation sector— the part of the economy that is now going through its formative years— is concentrated in a handful of cities.

Cities that have fallen behind can catch up by means of a “big push: a coordinated policy that breaks the impasse and simultaneously brings skilled workers, employers, and specialized business services to a new location.” Apparently this is only theory, however, since “looking at the map of America’s major innovation clusters, it is hard to find an example of one that was spawned by a big push.”

I would suggest that the jury is still out on whether the information society can create as many well-paid, full-time jobs as the manufacturing society in its heyday. The last book I reviewed, Jeremy Rifkin’s The Zero Marginal Cost Society, argues that it cannot. Rifkin believes that the information age is calling into question the whole idea of the paid job as defined by capitalism. The fact that knowledge is so easily shared may place a limitation on how much it will be bought and sold in the marketplace. When people can access the ideas of the most renowned scholars on the Internet for free, how many intellectuals will be paid to think?

I accept the assumption that as machines do more of the routine work, people will be liberated to engage in more creative activity. The question is how much of that creative activity will take the form of paid work. Maybe we will do less paid work in the aggregate, but distribute what paid work there is more evenly.

Why inequality?

Moretti’s take on inequality is consistent with his belief that the demand for qualified employees is ample, and the problem is on the supply side. In other words, the system is a meritocracy, with low pay and unemployment resulting from inferior qualifications. The way to remedy that is to invest more in education and/or admit more educated immigrants. (He notes that highly skilled immigrants can be job creators rather than job stealers because of their contribution to innovation and its economic multiplier effects.)

This meritocratic view is contested by other economists, notably Thomas Piketty in Capital in the Twenty-First Century. (See my review, especially Part 3.) In his view, the distribution of income depends not just on merit but on institutional factors, such as the organization and bargaining power of unions and the influence of executives over their own compensation. The widening pay gap between executives and other workers cannot be accounted for by a widening education gap. The distribution of income also depends on the share of national income going to owners of capital, which has been rising recently (from a range of 15-25% in rich countries in 1970 to a range of 25-30% recently). This happens when the return on capital remains high although the rate of general economic growth has slowed. Getting ahead through wage growth becomes harder compared to profiting from accumulated wealth.

Moretti makes a contribution to economic geography, but his general view of the job market never gets beyond the conventional wisdom to address the more interesting controversies.

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The New Geography of Jobs

October 16, 2014

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Enrico Moretti. 2013. The New Geography of Jobs. Boston: Houghton Mifflin.

Economist Enrico Moretti has a surprise for those who think that advanced means of communication and transportation have rendered the geographic location of work unimportant. The world is so connected, so the theory goes, that the same activity can be carried on almost anywhere. A factory can be located in Birmingham or Bangkok, and a software designer can work in a downtown office or a rural cabin. Moretti, on the other hand, contends that location matters, that the innovative work that drives today’s economy clusters in geographic centers of innovation. As a result, “Your salary depends more on where you live than on your resume.”

Moretti starts his book with the story of a young engineer who made a very consequential move in 1969. Seeking a more peaceful environment, he moved from Menlo Park in Silicon Valley to Visalia in a more agricultural area. In those days, the two places were statistically rather similar, but after forty years of change, they represent the geographic diversification Moretti is discussing. While Menlo Park exemplifies the thriving, high-tech, high-education center of innovation, “Visalia has the second lowest percentage of college-educated workers in the country, almost no residents with a postgraduate degree, and one of the lowest average salaries in America,” along with a high crime rate.

This is not an isolated phenomenon. Moretti calls it the “Great Divergence”:

A handful of cities with the “ right” industries and a solid base of human capital keep attracting good employers and offering high wages, while those at the other extreme, cities with the “wrong” industries and a limited human capital base, are stuck with dead-end jobs and low average wages. This divide— I will call it the Great Divergence— has its origins in the 1980s, when American cities started to be increasingly defined by their residents’ levels of education.

Moretti acknowledges that some forms of convergence are occurring as well. As poorer countries develop, many of them are becoming more similar to richer countries. Traditionally poorer regions such as the American South are also converging with other regions in many respects. But within countries and regions, some cities–such as Austin, Atlanta, Dallas, Durham and Houston in the South–are emerging as the affluent and educated centers of innovation, while others are being left behind.

From production to innovation

“Over the past half century, the United States has shifted from an economy centered on producing physical goods to one centered on innovation and knowledge.” Moretti notes that even in hi-tech areas such as computers, production jobs are declining, and job opportunities are mostly in the more professional, technical and managerial areas. We haven’t stopped making things–US manufacturing output is actually increasing, and locally made goods are often very fashionable–but manufacturing can no longer provide employment for tens of millions of people.

According to a study of companies in twelve industrialized countries, some firms are much more successful than others in finding a place in the new economy. The more successful ones “buy more computers, spend more on R & D, take out more patents, and update their management policies.” They don’t just produce what any number of other companies could produce; they lead in innovation, creating the jobs in what Moretti calls the “innovation sector.” He estimates that it currently includes only 10% of the jobs, but it is increasingly the “driver of our prosperity.” That’s because it is the major source of productivity gains, and it has a powerful multiplier effect that creates other jobs, especially in both professional and nonprofessional services. He calculates that five additional local jobs are created by each new high-tech job. Not only that, but the presence of many highly educated, highly paid workers in a metropolitan area boosts the productivity and wages of other workers in that area. As a result, even workers without college degrees are better off living in an area where many residents are well educated.

Geographic concentration

Why are the innovative companies and jobs clustered in a such a small number of metropolitan areas? A striking example is Seattle, which has benefitted greatly from Microsoft’s decision to move there from Albuquerque in 1979. The presence of one big hi-tech firm attracted others, such as Amazon, and had many other unforeseen consequences. For example, former employees of Microsoft have started 4,000 new businesses, most of them in the local area. Before the move, the percentage of college-educated workers in Seattle and Albuquerque differed by only 5%; today the difference is 45%!

Traditionally, the location of cities has depended on natural advantages such as harbors or access to natural resources. Since centers of innovation depend more on human capital, their location depends more on creative interactions among human beings. Once someone starts the creative ball rolling–a major university helps–then innovative activity feeds on itself in many ways. Moretti identifies three “forces of agglomeration” that foster the growth of an innovative center:

  • Thick labor markets: A labor market that already contains a lot of highly educated labor attracts more employers who need that labor, and vice versa. The more specialized the skills needed, the harder it is to find them outside of a major innovation center.
  • Specialized service providers: Innovative companies need specialized services such as “advertising, legal support, technical and management consulting, shipping and repair, and engineering support.” As those develop, they help create an entire “ecosystem” supporting innovation.
  • Knowledge spillovers: New ideas foster other new ideas to create a stimulating cultural environment that benefits all. In that way, education has a “social return” that benefits many others besides the holder of a degree. Moretti notes that this is a strong reason for society to share the costs of education, since it shares the benefits.

In the United States today, Silicon Valley is the #1 innovation cluster, followed by Austin, Raleigh-Durham, and Boston. The ten metropolitan areas with the largest share of college-educated workers are Stamford (CT), Washington, Boston, Madison, San Jose, Ann Arbor, Raleigh-Durham, San-Francisco-Oakland, Fort Collins-Loveland (CO), and Seattle-Everett.

One downside to living is these areas is the cost of housing, which is driven up by the competition of well-paid workers for proximity to good jobs and schools. This is another factor maintaining the geographic divergence between areas with different educational levels. Today the educated are more mobile, since they have the money, skills, and information to go where the opportunities are. Less educated workers can also benefit from the higher wages of thriving metropolitan areas, but only if they can reside there in the first place.

The divergence of places extends to many aspects of public and private life. Metropolitan areas that differ in educational and income level also differ in average life expectancy, family stability, political participation and resources for charitable giving. For example, men in some poorer metropolitan areas in the U.S. have life expectancies comparable to those of poor countries.

Continued

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The Zero Marginal Cost Society (part 2)

September 10, 2014

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The Collaborative Commons

In 1968, ecologist Garrett Hardin published his classic essay, “The Tragedy of the Commons.” Using sheep grazing on common land as his prime example, Hardin described how the pursuit of unbridled self-interest can be expected to destroy a common resource. Each individual keeps adding more sheep, since the benefits accrue to that individual while the costs are spread among many. Eventually the land is overgrazed and many sheep die. The conclusion: “Freedom in a commons brings ruin to all.”

For many years, economists could see only two models for managing resources: the capitalist model of private ownership and the socialist model of government ownership and top-down regulation. Yet the idea of the Commons refused to die.

In 1986—18 years after Hardin’s essay seemed to put the last proverbial nail in the coffin of Commons theory—Carol Rose pried open the casket, breathing new life into what many had already concluded was a dead idea. The Northwestern University law professor entitled her salvo “The Comedy of the Commons,” a scathing rejoinder to Hardin’s earlier thesis. Her spirited and rigorous defense of Commons governance rousted the academic community, spurring a revival of Commons scholarship and practice.

Long before strong centralized states and modern capitalism, many societies did in fact manage resources like pastures, forests and irrigation systems through informal systems of rights and responsibilities accepted by all. In 2009, Elinor Ostrom won the Nobel Prize in economics for her study of what makes such systems work, at least in certain contexts. I find it easier to imagine them working in small-scale settings like extended families or villages, but larger-scale societies with high-speed communications might also pull it off. Rifkin certainly thinks so. He envisions three kinds of Commons–Communications Commons, Energy Commons and Logistical Commons.

The Battle of the Century

Rifkin believes that the first half of this century will be dominated by the struggle between “prosumer collaboratists and investor capitalists.” Rifkin’s own involvement in that struggle began in 1979, when General Electric applied for a patent on a genetically engineered microorganism designed to consume oil spills. The US Patents and Trademark Office denied the patent, but the Supreme Court awarded it in a 5-4 decision. In 1987, the patent office ruled that any genetically engineered, multicellular organism could be patented. In 2002, the Foundation for Economic Trends, of which Rifkin is President, brought together 250 organizations from 50 countries in support of a “Treaty to Share the Genetic Commons.” It declared that the gene pool has an intrinsic value more fundamental than any commercial use, and it opposed the private ownership of genetic information in principle.

Private ownership of intellectual property may be necessary if such property is hard to produce without large investments of capital. But as the costs of acquiring and disseminating information plummet–the cost of reading DNA sequences is a case in point–Rifkin sees less to be gained by organizing society on the private ownership and profit model:

Patents and copyrights thrive in an economy organized around scarcity but are useless in an economy organized around abundance. Of what relevance is intellectual-property protection in a world of near zero marginal cost, where more and more goods and services are nearly free?

Like Jaron Lanier in Who Owns the Future?, Rifkin deplores the efforts of Big Data companies like Google and Facebook to collect, own and sell vast amounts of information collected from Internet users. He expects users to fight back, not by trying to charge for the information they provide, as Lanier would have it, but by “demanding that their knowledge be shared in open Commons for the benefit of all, rather than being siphoned off and enclosed in the form of intellectual property owned and controlled by a few.”

In the realm of energy, the battle will be between a centralized energy grid dominated by large producers and a decentralized grid where users produce and distribute a lot of their own renewable energy. Just this week, the New York Public Service Commission proposed such a “distributed” energy network.

The “Logistical Commons” would have a similar decentralized organization. Instead of big companies distributing products from a few warehouses and distribution centers, more sophisticated and standardized tracking would allow many enterprises to share the same facilities as needed.

The Sharing Society

In the Collaborative Commons described by Rifkin, people will get their information more from one another and less from centralized sources. Advertising will decline as people rely more on peer product reviews. Ownership will decline in value while access to shared resources will rise in value. That quintessential example of private property, automobile ownership, will become less important as car-sharing networks expand. Peer-to-peer lending and crowdfunding will compete with bank financing.

This rosy picture of the future depends, of course, on the assumption that high productivity and general abundance will have made rugged individualism largely obsolete. People won’t feel as strong a need to rely on what is mine, but will be more comfortable benefitting from what is ours.

When the marginal cost of producing additional units of a good or service is nearly zero, it means that scarcity has been replaced by abundance. Exchange value becomes useless because everyone can secure much of what they need without having to pay for it. The products and services have use and share value but no longer have exchange value.

Rifkin does acknowledge two main threats to abundance that we will need to overcome: climate change and cyberterrorism.

A human transformation

Taking a very long view of history, Rifkin connects revolutions in communications and energy with revolutions in human consciousness:

The great economic paradigm shifts in human history not only bring together communication revolutions and energy regimes in powerful new configurations that change the economic life of society. Each new communication/energy matrix also transforms human consciousness by extending the empathic drive across wider temporal and spatial domains, bringing human beings together in larger metaphoric families and more interdependent societies.

The latest communications and energy revolution takes this process farther than ever before:

Is it not possible to imagine the next leap in the human journey— a crossover into biosphere consciousness and an expansion of empathy to include the whole of the human race as our family, as well as our fellow creatures as an extension of our evolutionary family?

Seeing society as a Collaborative Commons makes it easier to see the entire biosphere as a Commons as well:

By reopening the various Commons, humanity begins to think and act as part of a whole. We come to realize that the ultimate creative power is reconnecting with one another and embedding ourselves in ever-larger systems of relationships that ripple out to encompass the entire set of relationships that make up the biosphere Commons.

Finally, Rifkin contrasts the new “social entrepreneurialism” with the “commercial entrepreneurialism” that has been embedded in capitalist markets:

The new spirit is less autonomous and more interactive; less concerned with the pursuit of pecuniary interests and more committed to promoting quality of life; less consumed with accumulating market capital and more with accumulating social capital; less preoccupied with owning and having and more desirous of accessing and sharing; less exploitive of nature and more dedicated to sustainability and stewardship of the Earth’s ecology. The new social entrepreneurs are less driven by the invisible hand and more by the helping hand. They are far less utilitarian and far more empathically engaged.

I am inclined to be skeptical of utopian visions, and I’m usually willing to assume that capitalism will continue, although hopefully with some egalitarian reforms. Rifkin’s extrapolations from current trends do not seem unreasonable, however. The fact that we can’t seem to create enough gainful employment to distribute the benefits of our own productivity does not bode well for capitalism. How long will people accept a system that maintains technologically unnecessary scarcities for the many while generating great abundance for the few? The fundamental principle of the Collaborative Commons, that all people have access to valued resources so they can both produce and consume, may prove irresistible.

After reading Lanier’s Who Owns the Future?, I had second thoughts about my own information-sharing activities because of concerns about the companies that collect and sell information that people provide for free. Rifkin helped restore my confidence that sharing is a good thing, and that the sharers will ultimately prevail over the monopolizers. One can certainly hope so.

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The Zero Marginal Cost Society

September 8, 2014

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Jeremy Rifkin. 2014. The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism. New York: St. Martin’s Press.

Jeremy Rifkin is the president of the Foundation on Economic Trends and a leading thinker on the transition to a more sustainable global economy based on new energy sources and infrastructure. In this latest of his many books, he predicts that capitalism will gradually decline and be largely supplanted by what he calls the “collaborative commons,” a system based on common access to cooperatively managed and shared resources. This sounds pretty utopian, but he bases his argument on some very real changes that are already occurring in how we produce and share information, obtain energy, and make things.

Rifkin’s version of the decline of capitalism is not based on its supposed failure, but on its success. The relentless quest for profit leads producers to raise productivity in order to lower unit costs and attract more buyers. Their competitors are forced to do the same. If the process is carried to its logical conclusion, productivity moves toward “the optimum point in which each additional unit introduced for sale approaches ‘near zero’ marginal cost…making the product nearly free.”

The information economy has already taken much of the profit out of some industries by making it so easy to obtain certain commodities; music and news are prime examples. Rifkin believes this is only the beginning:

The near zero marginal cost phenomenon has already wreaked havoc on the publishing, communications, and entertainment industries as more and more information is being made available nearly free to billions of people. Today, more than one-third of the human race is producing its own information on relatively cheap cellphones and computers and sharing it via video, audio, and text at near zero marginal cost in a collaborative networked world. And now the zero marginal cost revolution is beginning to affect other commercial sectors, including renewable energy, 3D printing in manufacturing, and online higher education. There are already millions of “prosumers”— consumers who have become their own producers.

In Part I, Rifkin reviews the history of capitalism, emphasizing the connections among energy sources, communication and transportation at each phase. The First Industrial Revolution depended on steam, printing and railroads; the Second Industrial Revolution relied on oil, the internal combustion engine and the telephone. In both cases, the trend was toward concentrations of economic power. “Vertically integrated corporate enterprises were the most efficient means of organizing the production and distribution of mass produced goods and services.” For a time, the only alternative to capitalism seemed to be another form of centralized power–state socialism.

Rifkin expects the Third Industrial Revolution, with its reliance on renewable energy and global electronic communications, to reverse the centralizing trend and distribute power more widely:

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

To put it simply, people will rely less on big corporations to meet their needs and more on one another.

A new infrastructure

When economists have thought about improvements in productivity, they have usually thought in terms of better machinery or better trained workers. However, economist Robert Solow found that changes in energy sources and infrastructure accounted for the greatest leaps in productivity. The Second Industrial Revolution was possible because of the electric grid, telecommunications network, interstate highway system, oil and gas pipelines, and water systems (all of which required government initiatives, by the way). Rifkin believes that the world is on the verge of a similar revolution that will take human productivity to a dramatically higher level.

First, he sees the creation of “a renewable-energy regime, loaded by buildings, partially stored in the form of hydrogen, distributed via a green electricity Internet, and connected to plug-in, zero-emission transport.” The cost of solar energy is now dropping exponentially, just as the cost of computing already has. All of the energy annually used in the global economy could be supplied by much less than one-tenth of one percent of the energy that reaches Earth from the sun. Rifkin expects 80 percent of our energy to be from renewable sources by 2040.

Another key development is the “Internet of Things,” which will connect “every machine, business, residence, and vehicle in an intelligent network,” enabling all of them to work smarter. Rifkin doesn’t provide detailed examples, but he cites studies that estimate the potential productivity gains:

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

Up until now, industrial manufacturing has required a lot of capital and large, vertically integrated organizations to produce goods economically. The development of 3D printing is changing that, making possible a transition “from mass production to production by the masses”:

Software— often open source— directs molten plastic, molten metal, or other feedstocks inside a printer, to build up a physical product layer by layer, creating a fully formed object , even with moveable parts, which then pops out of the printer. Like the replicator in the Star Trek television series, the printer can be programmed to produce an infinite variety of products. Printers are already producing products from jewelry and airplane parts to human prostheses. And cheap printers are being purchased by hobbyists interested in printing out their own parts and products. The consumer is beginning to give way to the prosumer as increasing numbers of people become both the producer and consumer of their own products.

The main thing one needs to be such a “prosumer” is access to the information that the printer needs to create an object, and that information is likely to be widely available in the information age. Rifkin also anticipates the expansion of low-cost education, as more learning occurs through “MOOCs”–massive open online courses.

The future of work

Rifkin acknowledges the potential of higher productivity to destroy millions of jobs by reducing the need for human labor. Jobs are disappearing because of a major structural change in the economy, not just because of a temporary recession or relocation of factories from one country to another. Although in the past, technological changes have created as many jobs as they destroyed–for example, creating factory jobs to replace farm jobs or white-collar jobs to replace blue-collar jobs–Rifkin does not see that substitution process continuing. The new information technologies are threatening white-collar and service jobs as much as manufacturing jobs.

The last book I discussed, Jaron Lanier’s Who Owns the Future?, argued that humans have to defend themselves against the smart machines by fully monetizing their own information contributions, that is, by charging for every idea, data, photo, etc., they share. Otherwise, a few owners and users of Big Data will get rich while the rest of us get poor. Rifkin’s solution is almost the opposite. He doubts that the capitalist, profit-centered model will work very well for anyone, and that all of us will end up exchanging information and things at little or no cost. Eventually, more of our time will be devoted to pursuing non-material ends, since obtaining the material necessities of life will have become so easy in a zero marginal cost world. While Lanier advocates a more thorough commodification of information, Rifkin expects less commodification and more sharing.

This will not happen overnight, and Rifkin makes an explicit distinction between time frames. “In the short and mid terms…the massive build-out of the IoT [Internet of Things] infrastructure in every locality and region of the world is going to give rise to one last surge of mass wage and salaried labor that will run 40 years.” A big part of this will be the transition to renewable energy sources and the conversion of existing buildings to use them. But in the latter half of this century, he expects most human labor to shift to nonprofit activities of one kind or another.

Continued

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Posted by Ed Steffes

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