Environmental Debt (part 2)

January 23, 2015

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Amy Larkin argues that by failing to factor in the future environmental costs of present economic activity, businesses are incurring debts that will have to be paid by someone. Externalizing such costs from business to society at large, and even future generations, boosts profits and makes environmentally damaging practices seem more economical than they really are. Since environmentally friendly practices are often less profitable in the short run, how can a free-market economy embrace them?

Private initiatives

One hopeful sign is that some corporations and their accounting firms are beginning to see the need for more “integrated” accounting, which includes environmental costs in financial calculations. “In November 2011, Puma became the first multinational corporation to create an integrated report that converted environmental information and data into monetary terms. The company’s 2010 Environmental Profit & Loss statement (EP&L) quantifies and monetizes environmental impact and integrates it into the operational P&L.” The results were startling: Puma found that its earnings would have been 75 percent lower if it had been charged the full cost of its operations.

Integrated accounting is challenging. Ideally it would include the cost of a product from “cradle to grave,” including the cost of disposing of it safely. Puma only got as far as “cradle to gate” accounting, the costs incurred in getting products to market. The more costs are considered, the more production and consumption practices may need to change to reduce them.

Larkin provides many examples of companies that are looking beyond short-term profits and trying to develop more sustainable ways of operating. Tiffany’s has taken initiative to reform mining practices, where “irresponsible mines, large and small, caused serious problems with water pollution, dislocation of local people, cyanide and heavy metal pollution and human rights abuses.” One incentive for Tiffany’s was to disassociate such practices from the image of their jewelry, which is supposed to be about “celebration and pleasure and memorializing love.”

Walmart shocked the retail world in 2006 by launching its sustainability initiative, vowing to “be supplied 100 percent by renewable energy; to create zero waste; and to sell products that sustain people and the environment.” This has been controversial with the company’s own shareholders, some of whom accused the leadership of socialism. (What socialist idea will they come up with next–decent wages?)

Unilever is the world’s largest ice cream company and a leader in methods of refrigeration. They decided to phase out hydrofluorocarbons (HFCs, a major contributor to climate change) from their coolers because they anticipated future regulations. They didn’t want to “get caught in costly and difficult supply problems reacting to a new regulatory framework imposed upon us,” in the words of their Vice President of Sustainability. They also went a step further, setting up an advocacy office to push for new industry standards and stricter regulation.

This brings up the point that social problems require social solutions. If only one company incurs the short-term costs of change, it may put itself at a competitive disadvantage and be punished by the market. The goal has to be for environmentally friendly innovations to be adopted throughout an industry, either through cooperative agreements or new regulations, or both. Larkin herself was a keynote speaker at the Sustainable Refrigeration Summit of the Consumer Goods Forum, an organization representing 400 retailers and manufacturers. Shortly after, the CGF board approved a recommendation to phase out HFCs.

Public initiatives

Larkin also praises far-sighted government initiatives when they have occurred. She cites the substantial health and financial benefits that have come from the Clean Air Act of 1963. More recently, however, “government is actually proving less reliable than business these days when it comes to environmental protection.” She doesn’t get into the politics of it, but clearly one of our major political parties has become steadfast in its opposition to new environmental legislation. The White House solar panels are a clue: Jimmy Carter had them put in, and Ronald Reagan had them taken out.

One area in which Larkin sees a role for government is in building a new energy infrastructure, with a smart grid and new storage capacity technology. Because renewable energy will be less centralized, it is “more complicated to ramp up than building a new Hoover Dam or a big nuclear power plant. Decentralized energy means that many players, many financiers and many regulations must align before taking action.” Larkin says that building the new energy infrastructure will cost about as much as going to war with Iraq. (One wonders why it’s so much easier to get support for war than for a safer and more sustainable energy system.)

One state that has moved ahead on its own is California. The California Solar Initiative (CSI) provides free solar installations for building owners who will make a ten-year commitment to buying solar power. With an annual budget of $3 billion, CSI provides more energy than Duke Energy gets from a new coal plant with similar up-front cost. But the environmental cost is much greater for dirty coal than for clean solar. The refusal to make such social investments will cost society more in the long run.

The challenge

At the end of her book, Larkin describes our current dilemma very bluntly. “If coal and oil cost their true prices based on new financial rules, how will that melt down the economy? If coal and oil continue to be underpriced, how will that melt down the environment?”

Opposition to making businesses accountable for environmental costs is understandable, since doing so seems very threatening to our present economy. Consumer prices would go up; some businesses would fail; some workers would lose their jobs. But carrying on business-as-usual will cost us more in the long run. The solution is a transition to business practices that can succeed without imposing such heavy environmental costs. If we are willing to share the start-up costs, new industries can flourish. The solar and wind energy industries each employ more workers than the coal industry already.

[M]any phenomenal technologies and systems are just coming to market or in development for water and energy efficiency. They will be deployed rapidly and at full scale only when their competitors no longer receive a financial advantage by overusing and polluting these same natural resources with no financial penalty. That means that we, the public, might have to spend more in the short term to provide these first movers a strong market advantage.

Change is hard, and no doubt there will be winners and losers. But if we can make the transition, we should see a net gain in the health and prosperity of the nation.


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.


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