The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism (5 page)

Today, the transformation of economic life from finance capital and the exchange of goods and services in markets to social capital and the sharing of goods and services in the Collaborative Commons is reshaping society’s
thinking about how to evaluate economic performance. The European Union, the United Nations, the Organization for Economic Co-operation and Development (OECD), and a number of industrialized and developing countries have introduced new metrics for determining economic progress, emphasizing “quality of life” indicators rather than merely the quantity of economic output. Social priorities, including educational attainment of the population, availability of health-care services, infant mortality and life expectancy, the extent of environmental stewardship and sustainable development, protection of human rights, the degree of democratic participation in society, levels of volunteerism, the amount of leisure time available to the citizenry, the percentage of the population below the poverty level, and the equitable distribution of wealth, are among the many new categories used by governments to evaluate the general economic welfare of society. The GDP metric will likely decline in significance as an indicator of economic performance along with the diminution of the market exchange economy in the coming decades. By midcentury, quality of life indices on the Collaborative Commons are likely to be the litmus test for measuring the economic wellbeing of every nation.

In the unfolding struggle between the exchange economy and the sharing economy, economists’ last fallback position is that if everything were nearly free, there would be no incentive to innovate and bring new goods and services to the fore because inventors and entrepreneurs would have no way to recoup their up-front costs. Yet millions of prosumers are freely collaborating in social Commons, creating new IT and software, new forms of entertainment, new learning tools, new media outlets, new green energies, new 3D-printed manufactured products, new peer-to-peer health-research initiatives, and new nonprofit social entrepreneurial business ventures, using open-source legal agreements freed up from intellectual property restraints. The upshot is a surge in creativity that is at least equal to the great innovative thrusts experienced by the capitalist market economy in the twentieth century.

The democratization of innovation and creativity on the emerging Collaborative Commons is spawning a new kind of incentive, based less on the expectation of financial reward and more on the desire to advance the social well-being of humanity. And it’s succeeding.

While the capitalist market is not likely to disappear, it will no longer exclusively define the economic agenda for civilization. There will still be goods and services whose marginal costs are high enough to warrant their exchange in markets and sufficient profit to ensure a return on investment. But in a world in which more things are potentially nearly free, social capital is going to play a far more significant role than financial capital, and economic life is increasingly going to take place on a Collaborative Commons.

The purpose of this book is not merely to present a laundry list of collaborative initiatives—there are hundreds of articles and dozens of
books on the budding collaborative world. Rather, we will examine how this change in human behavior is making obsolete the core values upon which we live and the institutions we created in the capitalist era, and explore the new values and institutions that will propel the coming collaborative era.

Until now, the many books and articles devoted to the growing collaborative culture have assumed that the new ways of organizing commerce, while disruptive, would not ultimately threaten the overarching assumptions upon which market capitalism—and its foe, state socialism—are based. The prevailing sentiment, even among many of the most ardent proselytizers of the new model, is that a collaborative future will greatly expand human participation and creativity across society and flatten the way we organize institutional life in virtually every field, but ultimately be absorbable into a more humane and efficient capitalist market.

A quick glance at the current configuration of global capitalism certainly suggests its staying power. The global Fortune 500 companies continue to consolidate control over the commercial affairs of the planet, with 2011 revenues exceeding one-third of the GDP of the world.
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Given the enormous power and reach of the capitalist system, it’s difficult to imagine a world in which capitalism plays a much diminished role.

Part of the reason we have such a difficult time contemplating life after capitalism is the failure to understand how it came into being. To appreciate how we got here, let’s step back and look at the pivotal economic paradigm shifts in history, and how they changed the organization of society. Throughout history, great economic transformations occurred when human beings discovered new energy regimes and created new communication media to organize them. The convergence of energy regimes and communications media establishes a new matrix for reorienting the temporal-spatial dynamic, allowing larger numbers of people to come together and cohere in more complex, interdependent social organizations. The accompanying technology platforms constitute the infrastructure but also dictate the way the economy is organized and managed. In the nineteenth century, steam-powered printing and the telegraph became the communication media for linking and managing a complex coal-powered rail and factory system, connecting densely populated urban areas across national markets. In the twentieth century, the telephone, and later, radio and television, became the communication media for managing and marketing a more geographically dispersed oil, auto, and suburban era and a mass consumer society. In the twenty-first century, the Internet is becoming the communication medium for managing distributed renewable energies and automated logistics and transport in an increasingly interconnected global Commons.

The technology platforms of the First and Second Industrial Revolutions were designed to be centralized with top-down command and control. That’s because fossil fuels are only found in certain places and require
centralized management to move them from underground to the final end users. The centralized energies, in turn, require centralized, vertically integrated forms of communication in order to manage the momentous speed-up in commercial transactions made possible by the new sources of power.

The enormous capital cost in establishing centralized communication/energy matrices meant that the new industrial and commercial enterprises embedded in and dependent on these technology platforms had to create their own giant, vertically integrated operations across the value chain. This was the only way to ensure sufficient economies of scale to guarantee a return on the investment. The high up-front cost of establishing vertically integrated enterprises in the First and Second Industrial Revolutions required large amounts of investment capital.

Still, the investment of huge amounts of capital paid off. Bringing the entire value chain under one roof allowed businesses to cut out some of the costly middle men, significantly reducing their marginal costs and the price of their goods and services sold in the market. But the irony is that the same vertical integration allowed a few market leaders to emerge in each industry and monopolize their respective fields, often preventing startup companies from introducing even newer technologies to reduce marginal cost and the price of goods and services, and by so doing, gain a foothold and sufficient market share to effectively compete.

The emergence of the IoT infrastructure of the Third Industrial Revolution, with its open architecture and distributed features, allows social enterprises on the Collaborative Commons to break the monopoly hold of giant, vertically integrated companies operating in capitalist markets by enabling peer production in laterally scaled continental and global networks at near zero marginal cost.

To begin with, the IoT technology platform relies on renewable energies that are found everywhere in some frequency or proportion. Moreover, while the harvesting technologies are getting ever cheaper and will be as inexpensive as cell phones and computers in the coming decade, the sun off your roof, the wind off the side of your building, the garbage converted to biomass in your kitchen are nearly free—after the fixed investment in the harvesting technology is paid back—just like the information we now generate and share on the Internet is nearly free. However, these distributed renewable energies have to be organized collaboratively and shared peer-to-peer across communities and regions to create sufficient lateral economies of scale to bring their marginal cost to zero for everyone in society. The IoT, because it is a distributed, collaborative, and peer-to-peer technology platform, is the only mechanism agile enough to manage renewable energies that are similarly constituted and organized.

The fixed costs of bringing online a distributed IoT infrastructure, while considerable, are far less than those required to build out and maintain the more centralized technology platforms of the First and Second Industrial Revolutions. While fixed costs are less, the Internet of Things also
brings down the marginal cost of communication, energy, and logistics in the production and distribution of goods and services. By eliminating virtually all of the remaining middlemen who mark up the transaction costs at every stage of the value chain, small- and medium-sized enterprises—especially cooperatives and other nonprofit businesses—and billions of prosumers can share their goods and services directly with one another on the Collaborative Commons—at near zero marginal cost. The reduction in both fixed and marginal costs dramatically reduces the entry costs of creating new businesses in distributed peer-to-peer networks. The low entry costs encourage more people to become potential entrepreneurs and collaborators, creating and sharing information, energy, and goods and services on the Commons.

The changes brought on by the establishment of an IoT infrastructure and Collaborative Commons go far beyond the narrow confines of commerce. Every communication/energy matrix is accompanied by a set of broad prescriptions about how society and economic life are to be organized that mirror the possibilities and potentials unleashed by the new enabling technologies. Those prescriptions become canonized in an overarching belief system designed to suggest that the society’s new economic paradigm is merely a reflection of the natural order and therefore the only legitimate way to conduct social life. I know of no single instance in history in which a society’s view of the natural order was at odds with the way it orchestrated its particular relationship with the environment. By constructing a view of nature that replicated its own way of acting on the world, every society could take comfort in knowing that the way it was organized conformed to the natural order of things. Once this unconscious process of mass self-justification became firmly entrenched in the public mind, any criticism of the way the economy and society was organized came to be seen as heresy or idiocy since it was at odds with the rules governing nature and the cosmos. The cosmologies that governed each economic paradigm were ultimately a more reliable guarantor of social stability than all the armies in history in defending the status quo.

That’s why paradigm shifts are so disruptive and painful: they bring into question the operating assumptions that underlie the existing economic and social models as well as the belief system that accompanies them and the worldview that legitimizes them.

In order to fully appreciate the immense economic, social, political, and psychological changes that will likely come with the transition from a capitalist market to a Collaborative Commons, it is helpful to place this turning point in the human journey within the context of the equally disruptive changes that accompanied the shift from the feudal to the market economy in the late medieval era and, again, from the market economy to the capitalist economy in the modern era. Understanding, in each instance, how the changeover to a new communication/energy matrix triggered a transformation into a new economic paradigm, fundamentally altering the
worldview of much of human society, will help us better grasp the evolutionary mechanisms that guide the economic journey and that have led us to the present. This understanding gives us the historical perspective to wrestle with the tumultuous changes occurring across the global economy today as the paradigm shifts again, this time from capitalist markets to Collaborative Commons.

Part I

The Untold History of Capitalism

Chapter Two

The European Enclosures and the Birth of the Market Economy

T
he feudal economy in Europe can best be characterized as a subsistence communication/energy complex. The labor power of serfs, oxen, and horses made up the bulk of the energy matrix. The woodlands of Europe produced abundant thermal energy for heating and small-scale metallurgy. With the exception of the clergy and a small number of landowners who presided over the manorial lands, the population was illiterate, and economic life was yoked to the temporal and spatial restraints of oral culture. With the old Roman roads abandoned and in disrepair, commerce and trade virtually disappeared between the seventh and twelfth centuries, returning economic life back to thousands of isolated localities whose primitive existence relied almost entirely on subsistence agriculture.
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Virtually all economic production was for immediate use and only the most meager surpluses were traded in local fairs to supplement the daily life of manorial estates and small villages scattered across the European countryside.

The Feudal Commons

In England, as elsewhere in Europe, agricultural life was organized around the commons. Feudal landlords leased their land to peasant farmers under various tenancy arrangements. While freeholders were guaranteed tenancy
from generation to generation and could not be dislodged from their ancestral homes, leaseholders were less fortunate and were only guaranteed limited occupancy that rarely exceeded three lifetimes, after which the landlords could either impose new leasing arrangements or withdraw the leases. Customary tenants had virtually no tenancy rights and occupied land at the sole discretion of the landlord.

The tenancy arrangements required that the peasants either turn over a percentage of their harvest to the landlord or work his fields as well as their own throughout the year. In the late medieval period, with the limited introduction of a money economy, tenants were required to pay rent or taxes to the landlord as a condition of their lease.

Feudal agriculture was communally structured. Peasants combined their individual plots into open fields and common pastures and farmed them collectively. The commons became the first primitive exercise in democratic decision making in Europe. Peasant councils were responsible for overseeing economic activity, including planting and harvesting, crop rotation, the use of forest and water resources, and the number of animals that could graze on the common pastures.

The feudal notion of property relations was completely different from ours today. We think of property as an exclusive personal possession that can be held or exchanged in the marketplace. By contrast, in the feudal economy, all earthly things made up God’s creation and were his exclusively to dispose of. God’s creation, in turn, was conceived of as a “Great Chain of Being,” a rigidly constructed hierarchy of responsibilities that ascended upward from the lowest creatures to the angels in heaven. Each creature on the rungs of the spiritual ladder was expected to serve those above and below in a tightly prescribed set of obligations to ensure the proper functioning of the creation as a whole. Within this theological framework, property was conceptualized as a series of trusts administered pyramidally from the celestial throne down to the peasants working the communal fields. In this schema, property was never exclusively owned, but rather divvied up into spheres of responsibility conforming to a fixed code of proprietary obligations. For example, when the king granted land to a lord or vassal, “his rights over the land remained, except for the particular interest he had parted with.” The Harvard historian Richard Schlatter explains that “no one could be said to own the land; everyone from the king down through the tenants and sub-tenants to the peasants who tilled it had a certain dominion over it, but no one had an absolute lordship over it.”
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The feudal economy persisted, relatively unmodified, for more than 700 years. In the 1500s, however, new economic forces began to chip away at the feudal order, beginning in Tudor England and later spreading to other parts of Europe. Communally held land was enclosed and transformed into private property and exchanged in the marketplace, in some instances by license of the king or by acts of parliament and, at other times, by joint agreement of the village commons.
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The Enclosure Movement, viewed by many historians as “the revolution of the rich against the poor,” was carried out in England between the sixteenth and early nineteenth centuries, fundamentally altering the economic and political landscape. Millions of peasants were uprooted from their ancestral lands and forced to act as free agents whose labor power would henceforth be available for hire in the budding medieval marketplace.
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The first wave of English enclosures was sparked by two related phenomena that acted synergistically to undermine the feudal order. In the early stages, rising demand for food, occasioned by a burgeoning urban population, triggered an inflationary spiral, placing increasing hardships on feudal landlords whose land rents were fixed at preinflationary rates. At the same time, an incipient textile industry was forcing up the price of wool, making it more financially lucrative for landlords to enclose communal land and switch over to raising sheep.
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Hundreds of thousands of displaced farm families watched helplessly as sheep grazed on the grassland that just a few years earlier had been tilled for oats and rye to feed their own children. Everywhere people were reduced to starvation while sheep were fattened and fleeced to rush wool to the new textile factories going up in England and on the continent.

Sir Thomas More captured the bitter spirit of the times in
Utopia
, a scathing attack on the greed of the landlord class:

Your sheep, that were wont to be so meek and tame and so small eaters, now, and I hear say, become so great devourers and so wild, that they eat up and swallow down the very men themselves. They consume, destroy, and devour whole fields, houses and cities.
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A second wave of enclosures occurred roughly between 1760 and the 1840s.
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The First Industrial Revolution was beginning to spread across England and the rest of Europe. The new economy brought with it an ever-expanding urban population requiring more food. The high prices spurred landlords to enclose their remaining lands, completing a long transition that took Europe from a subsistence-based rural economy to a modern market-directed agricultural economy.

The great enclosures and the market economy that ensued changed the very nature of property relations, from conditional rights to exclusive ownership. After centuries in which people belonged to the land, the land now belonged to individual people in the form of real estate that was negotiable and exchangeable in the open marketplace. One’s ancestral home metamorphosed into a commercial resource that could be used both as a source of capital and credit in the pursuit of commercial gain. One’s labor similarly became a form of exclusive property that could be freely bought and sold in the marketplace in a new world governed by contractual relationships rather than communal obligations and social status.

The enclosure of the English countryside gave rise not only to the modern notion of private property relations operating in markets, but also to a legal system to oversee it. In the feudal economy, the very limited economic exchange rarely extended beyond close family relations and kinship communities. Lacking an enforceable common law and statutes to accompany it, people were reluctant to sell and buy property outside their immediate social sphere. In tightly knit kinship communities, one’s word guaranteed the trustworthiness of the exchange between neighbors.

It is generally acknowledged that a private-property regime makes modern markets viable. But, it’s also important to realize that an anonymous market where strangers are exchanging goods and services would not be possible without an enforceable legal code. A fully functioning private-property regime operating in markets requires a legal system backed up by police enforcement and courts to ensure that sellers and buyers uphold their contractual obligations. The English legal code, which matured alongside the transition from proprietary obligations on the feudal commons to property rights in the modern marketplace, was instrumental in ensuring the passage from the old order to the new era.

Most historians note the importance of the growing wool market and the development of a legally enforceable private-property regime in the passage from feudal life to the modern market economy. There were, however, other economic forces at work. Anthropologists point to a slew of new agricultural technologies, like the heavy-wheeled plow in northern Europe, the replacement of oxen by horses, and the changeover from two-field to three-field rotation that greatly increased agricultural productivity in the thirteenth and fourteenth centuries, leading to a dramatic growth in human population—interrupted only temporarily by the plague—and the advent of urban life. Historical accounts of the period also focus on the new innovations in metallurgy and a spate of new mechanical inventions like the cam, spring and treadle, sophisticated cranks, connecting rods, and governors that helped spur the changeover from reciprocating to continuous rotary motion.
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All these developments were significant, but secondary to a more fundamental change that gave rise to what a handful of historians have dubbed the soft proto-industrial revolution of the medieval era.

The Rise of the Market Economy

It was the coming together of the print revolution and water and wind power in the late Middle Ages that ushered in the transformation from the feudal to the market economy, altering the economic paradigm and social construction of Europe. What many historians and economic theorists often miss is that the capitalist economy emerged out of the soft proto-industrial market economy that existed in much of Europe (and later America), and not out of the earlier feudal economy. In fairness to Adam Smith and
Karl Marx, each at least touched on water and wind power in their writings. Smith referred to the new sources of power generation as an example of the division of labor, and Marx contrasted the intermittence of water and wind power to the reliable continuity of steam power, which assured a dependable and perpetual production cycle. Marx, like other intellectuals of the period, also failed to differentiate the feudal economy from the medieval one that grew out of it, famously and mistakenly remarking that “the hand-mill gives you society with the feudal lord; the steam-mill, society with the industrial capitalist.”
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In fact, wind energy helped fundamentally alter power relations away from the feudal lord and toward the townsmen and the rising burgher class of the medieval era.

Marx also alluded to the importance of the printing press, but only as a means of reawakening scientific interests and pursuits:

Gunpowder, the compass, and the printing press
were the 3 great inventions which ushered in bourgeois society. Gunpowder blew up the knightly class, the compass discovered the world market and founded the colonies, and the printing press was the instrument of Protestantism and the regeneration of science in general; the most powerful lever for creating the intellectual prerequisites.
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Neither Smith nor Marx seemed to understand, however, that the print revolution and water and wind power were indispensable to each other and that together they created a general-purpose technology platform for an economic paradigm shift that changed the European social and political landscape.

The water mill was known in antiquity and experimented with in Rome. Yet the technology never developed sufficiently to challenge human slavery as a power source. New technological innovations, beginning in the tenth and eleventh centuries in Europe, catapulted water power to the center of economic life. By the late eleventh century, there were more than 5,600 water mills operating in 34 counties in England, according to the census. France boasted 20,000 water mills at the time, for an average of one mill for every 250 people.
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The economic impact was dramatic. A typical water mill generated two to three horsepower for approximately half the time the mill was operating. A water mill could replace the labor of 10 to 20 people. In France alone, the hydraulic energy generated by water mills equaled the power generated by one-quarter of the adult population of the kingdom—a staggering increase in power capacity.
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Most of the early water mills were financed by the manorial lords and installed on the rivers and streams that coursed through their lands. The emerging towns and cities of Europe erected their own water mills, providing a competing source of power to the lord.

Where water was either lacking, too intermittent, or on the property of the lords, towns and cities turned to wind power. The first European
windmill was erected in Yorkshire, England, in 1185.
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Windmills quickly spread across the plains of northern Europe. Because wind is everywhere, not bound to royal lands, and free, the power source could be erected anywhere. Towns and cities rushed headlong into the new energy regime, with a source of power at hand that allowed them to even the playing field with local lords. Mindful that wind brought them a new democratic source of power, the burghers of the cities referred to this new invention as the “commoners’ mill.”
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While water mills and windmills were used in milling grains, tanning, laundering, operating bellows for blast furnaces, creating pigments for paint, crushing olives, and a host of other economic activities, the water mill’s most important use was in the fulling industry. Fulling is the first step in turning wool into cloth. As the wool leaves the loom, it has to be scoured of impurities, cleaned, and thickened by beating it in water. This was traditionally done by men trampling the cloth in a trough. The water mill transformed the process of fulling. Human feet were replaced by wooden hammers, which were raised and dropped by a mechanism powered by the water mill. A series of wood hammers could replace an entire group of fullers and be operated by a single person.