The 2016 World Economic Forum Misfires With Its Fourth Industrial Revolution Theme by Jeremy Rifkin
Global business leaders, heads of state, public intellectuals, and NGO’s will be making their annual pilgrimage to the tiny ski resort village of Davos, Switzerland on January 20th- 23rd. The forum is a unique venue crafted by the German economist, Klaus Schwab, more than 40 years ago. Its primary mission is to engage the world’s elite in future forecasting, with the objective of preparing them for “the next big thing.”
While the central theme of each year’s forum is often spot on and, more often than not, inspiring and thought-provoking, occasionally, the forum misfires.
At this year's SALT New York conference, Jean Hynes, the CEO of Wellington Management, took to the stage to discuss the role of active management in today's investment environment. Hynes succeeded Brendan Swords as the CEO of Wellington at the end of June after nearly 30 years at the firm. Wellington is one of the Read More
The Fourth Industrial Revolution
This year, the central theme is the Fourth Industrial Revolution. Professor Schwab introduced the theme in a lengthy essay published in Foreign Affairs in December 2015. He argues that we are on the cusp of a Fourth Industrial Revolution that will fundamentally change the way we work and live in the coming decades. Much of the essay’s text eloquently describes the vast technological changes brought on by the digitalization of economic and social life and its disruptive impact on conventional business practices and social norms. I don’t disagree. Where I take exception is with Professor Schwab’s suggestion that these initiatives represent a Fourth Industrial Revolution.
Schwab says that the First Industrial Revolution introduced steam-powered and mechanized production. The Second Industrial Revolution introduced electric power and mass-production processes. The Third Industrial Revolution introduced the digitalization of technology. He then declares that “now a Fourth Industrial Revolution is building on the Third, the digital revolution that has been occurring since the end of the last revolution. It is characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.”
But here’s the rub. The very nature of digitalization – which characterizes the Third Industrial Revolution – is its ability to reduce communications, visual, auditory, physical, and biological systems, to pure information that can then be reorganized into vast interactive networks that operate much like complex ecosystems. In other words, it is the interconnected nature of digitalization technology that allows us to penetrate borders and “blur the lines between the physical, digital, and biological spheres.” Digitalization’s modus operandi is “interconnectivity and network building.” That’s what digitalization has been doing, with increasing sophistication, for several decades. This is what defines the very architecture of the Third Industrial Revolution. All of which raises the question, why then, a Fourth Industrial Revolution?
Perhaps, realizing he’s on thin ground, arguing that “blurring the lines” between the physical, digital, and biological world is somehow a qualitatively “new development” that necessitates the postulation of a Fourth Industrial Revolution, Professor Schwab switches his argument away from what the technology does, concentrating rather, on the dramatic temporal, spatial, and organizational effects of digitalization, suggesting that the changes are so pronounced that they warrant the exiting of the Third Industrial Revolution and the entrance of the Fourth Industrial Revolution onto the world stage. Schwab writes “there are three reasons why today’s transformations represent not merely a prolongation of the Third Industrial Revolution, but rather the arrival of a Fourth and distinct one: velocity, scope, and systems impact.” On closer examination, Schwab’s argument that a qualitative change in the velocity, scope, and systems impact of the new technologies forces a shift from a Third to a Fourth Industrial Revolution fails to hold up on several grounds.
The plunging fixed costs of digital technology, the near Zero Marginal Cost of utilizing it and the intrinsic interconnected nature of the technology itself is what has enabled a qualitative leap in “velocity, scope, and systems impact” for the past twenty-five years. Certainly Professor Schwab is aware that digital technology – the heart of the Third Industrial Revolution – has been responsible for unleashing exponential curves, disrupting entire sectors of the economy, and creating new business models for several decades, beginning with the doubling of capacity and the halving of cost of computer chips at Intel, bringing the cost of computing to near Zero Marginal Cost. Wherever digital technology has spread – personal computers, cell phones, the World Wide Web, social media, data storage, digital music and video, renewable energy technology, fabrication technology, robotics, artificial intelligence, gene splicing and gene sequencing, synthetic biology, GPS tracking, and now the Internet of Things – the velocity, scope, and systems impact has been both exponential and transformative. Again, this has been going on for decades.
The music industry, television, the news media, the knowledge sector, and more recently, the energy sector, transport sector, and retail sector have been massively disrupted and diminished by the free sharing of music, YouTube videos, e-books, social media, Wikipedia, and Massive Open Online Courses at near Zero Marginal Cost. Millions of people are also producing renewable energy at near Zero Marginal Cost, car sharing and home sharing at low marginal cost, producing 3D printed products at low marginal cost, and increasingly transferring their shopping to virtual retail. At the same time, while traditional industries have declined, thousands of new entrepreneurial enterprises – some profit driven, others nonprofit – have arisen. These new enterprises are harnessing the productivity potential of the digital revolution by creating the digital platforms, algorithms, apps, and interconnections, speeding humanity into the digital era and a Third Industrial Revolution.
Still, despite the fact that for several decades now, the introduction and spread of digital technology and accompanying networks across sector after sector has gone hand-in-hand with exponential curves whose velocity, scope, and systems impact has been massively disruptive and forced a wholesale rethinking of the way we do business, Professor Schwab argues that “the speed of current breakthroughs has no historic precedent.” Quite the contrary.
Nor are exponential curves and velocity, scope, and systems impact only unique to the digital revolution. Consider, for example, the exponential curves and the velocity, scope, and systems impact that accompanied the First Industrial Revolution as society was forced to make a wholesale transformation from a largely agricultural society to an industrial economy in less than four decades. Would Professor Schwab have said that the dramatic change in velocity, scope, and systems impact during the First Industrial Revolution justify naming it a Second Industrial Revolution at some point, even though the defining technologies of the First Industrial Revolution were still operational and not yet replaced by the Second Industrial Revolution technologies and infrastructure? Doubtful!
Here’s a better way of understanding the current era. The digital revolution of the past forty years is maturing with each new network interconnection into a system-wide phenomenon, changing the way we work, live, and govern ourselves. Like the First and Second Industrial Revolutions, the system comes together when three defining technologies emerge and converge to create what we call in engineering, a general purpose technology platform that fundamentally changes the way we manage, power, and move economic activity: new communication technologies to more efficiently manage economic activity; new sources of energy to more efficiently power economic activity; and new modes of transportation to more efficiently move economic activity. Each of these defining technologies interacts with each other to enable the system to operate as a whole (Professor Schwab only glimpsed a small part of the technological matrix that creates the great economic paradigm shifts in history). For example, in the 19th century, steam-powered printing and the telegraph, abundant coal, and locomotives on national rail systems gave rise to the First Industrial Revolution. In the 20th Century, centralized electricity, the telephone, radio and television, cheap oil, and internal combustion vehicles on national road systems converged to create an infrastructure for the Second Industrial Revolution.
Today, the system-wide infrastructure is being scaled up and built out for the Third Industrial Revolution. The digitalized communication Internet is converging with a digitalized renewable Energy Internet, and a digitalized, GPS-guided and soon driverless Transportation and Logistics Internet, to create a super-Internet to manage, power, and move economic activity across society’s value chains. These three Internets ride atop a platform called the Internet of Things. In the Internet of Things era, sensors will be embedded into every device and appliance, allowing them to communicate with each other and Internet users, providing up to the moment data on the managing, powering, and moving of economic activity in a smart digital society. Currently, 14 billion sensors are attached to resource flows, warehouses, road systems, factory production lines, the electricity transmission grid, offices, homes, stores, and vehicles, continually monitoring their status and performance and feeding big data back to the Communication Internet, Energy Internet, and Transportation and Logistics Internet. By 2030, it is estimated there will be more than 100 trillion sensors digitally connecting the human and natural environment in a global distributed intelligent network. For the first time in history, the entire human race can collaborate directly with one another, democratizing economic life.
The digitalization of communication, energy, and transportation also raises risks and challenges, not the least of which are guaranteeing network neutrality, preventing the creation of new corporate monopolies, protecting personal privacy, ensuring data security, and thwarting cyber-crime and cyber-terrorism. The European Commission has already begun to address these issues by establishing the broad principle that “privacy, data protection, and information security are complimentary requirements for Internet of Things services.”
In this expanded digital economy, private enterprises connected to the Internet of Things can use Big Data and analytics to develop algorithms that speed aggregate efficiency, increase productivity, and dramatically lower the marginal cost of producing and distributing goods and services, making businesses more competitive in an emerging post-carbon global marketplace. (Marginal cost is the cost of producing an additional unit of a good or service, after fixed costs have been absorbed). The marginal cost of some goods and services are already approaching zero, allowing millions of prosumers connected to the Internet of Things to produce and exchange things with one another, for nearly free, in the growing Sharing Economy.
The peer to peer nature of the Internet of Things platform allows millions of disparate players—small and medium sized businesses, social enterprises, and individuals—to come together and produce and exchange goods and services directly with one another, eliminating the remaining middle men that kept marginal costs high in the Second Industrial Revolution. This fundamental technological transformation in the way economic activity is organized and scaled portends a great shift in the flow of economic power from the few to the multitudes and the democratization of economic life.
It is important to emphasize that the transition from the Second to the Third Industrial Revolution will not occur overnight, but, rather, take place over thirty to forty years. Many of today’s global corporations will successfully manage the transition by adopting the new distributed and collaborative business models of the Third Industrial Revolution while continuing their traditional Second Industrial Revolution business practices. In the coming years, capitalist enterprises will likely find more value in aggregating and managing laterally scaled networks than in selling discrete products and services in vertically integrated markets.
Digital interconnectivity across virtual, physical, and biological borders and across every sector of society is already challenging some of our most cherished beliefs about economic, social, and political life. In the digitalized Third Industrial Revolution, social capital is as vital as market capital, access is as important as ownership, sustainability supersedes consumerism, collaboration is as crucial as competition, virtual integration of value chains gives way to lateral economies of scale, intellectual property makes room for open sourcing and creative commons licensing, GDP becomes less relevant, and social indicators become more valuable in measuring the quality of life of society, and an economy based on scarcity and profit vies with a Zero Marginal Cost Society where an increasing array of goods and services are produced and shared for free in an economy of abundance.
Does it really matter whether we classify the emerging technological configuration as a Third or Fourth Industrial Revolution? I believe it does. Both Professor Schwab and I agree that the introduction of digital technology across society over the past half-century has spawned vast, interconnected networks, fundamentally changing the way we organize our economic, political, and social life. We both would also agree that digitalization is the hallmark and defining technology in what has become known as the Third Industrial Revolution.
I would argue, however, that the evolution of digitalization has barely begun to run its course and that its new configuration in the form of the Internet of Things represents the next stage of its development. With digitalization, we have the tool to connect the human race in increasingly inclusive networks so that we can begin to think and behave as an extended human family for the first time in history. The same digital technology is also beginning to embed us in the rich ecological networks that make up our common biosphere, enabling us to reaffirm our primordial relationship with the indivisible community to which we and our fellow creatures all belong, and whose well-being is indispensable to our ability to flourish on Earth. The Third Industrial Revolution – the digital revolution – has yet to reach its vast potential, making it far too early to declare it over and done. It is possible that a new technology revolution, as powerful, expansive, and far-reaching in its impact on society as digitalization, will come along in the near or distant future, at which time we might affix the label “Fourth Industrial Revolution.”
The digitalized Third Industrial Revolution brings us to the cusp of a promising new economic era, with untold benefits for humankind. What is required now is a global commitment to phase in the Internet of Things platform and facilitate the next phase in the evolution of a digitalized Zero Marginal Cost Society and Third Industrial Revolution economy if we are to create a more prosperous, equitable, humane, and ecologically sustainable society.
Jeremy Rifkin is the author of The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism and The Third Industrial Revolution: How Lateral Power is Transforming Energy, the Economy, and the World. Mr. Rifkin is an advisor to the European Union and to heads of state around the world, and president of the Foundation on Economic Trends in Washington, DC.