The lowering marginal costs


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POWER, MOBILITY AND COMMUNICATIONS

The world is changing with the modern technologies available to us. It is not only about the availability of those technologies, but mostly about the changes they bring to the societies and the life we live. To explain what is going all around us, I will refer for a moment to the theory of the industrial revolutions proposed by the American thinker Jeremy Rifkin.

Jeremy Rifkin claims that every society needs three things to organise themselves. These are a source to generate power, a form of communications and a form of mobility. An industrial revolution occurs when at a specific moment in time, new technologies emerge in those three fields of socio-economic life and converge with each other making the world or making the economies change profoundly.

They change the way we manage, we power, and we move the economic life. New modes of communications give us new possibilities to manage economic life. New sources of energy are about how we can more efficiently power the economic life. And, the new modes of mobility are decisive for how we can more efficiently move our economic life.



INDUSTRIAL REVOLUTIONS

In the 19th century, it was the steam power that changed the societies and economies for good. Mass production was introduced in manufacturing. Craft workshops changed into factories producing en masse.

What many forget; however, steam power also made possible steam printing that in turn, allowed for cheap and efficient communications. In a comparison of course to what we understand as communications today – it allowed for quick and affordable spreading of the news and information in local and regional communities. Later it was also the telegraph that allowed fast conveying of messages to distant locations. It took only several hours to write, convey, and deliver a message from Europe to Asia door to door. Unimaginable for past generations who awaited a slice of information for long but long months.

The 19th century brought yet another ground-breaking advancement. It was about the beginning of steam-powered transport. Railways allowed for getting cities and smaller communities together. Faster and high-volume transport technology allowed for creating national markets. Steamships made intercontinental trading routes closer by shortening the transit times radically in comparison to times when sailors could only rely on wind or slaves rowing in the galleys.


In the 20th century, it was the telephone, radio and television that changed the communications. The phone for the first time allowed for instant communications with people being in some other parts of the world. And yet another power source was discovered and quickly widespread. It was crude oil. New mobility solutions based on internal combustion engine were invented and changed the way people and goods moved. Cars, buses, and trucks appeared on the roads revolutionizing transportation, of course in comparison to past ages. With time transportation got possible to each and every one of us on individual terms, at least in the developed world. Maritime transport became yet quicker and more efficient.

Consequently, the conveying of goods between continents got cheaper and cheaper. And finally, air transport allowed people to move between continents quickly. What happened next was the globalization process.

Mass production based on power generated by the commercial power plants became even more efficient and reliable getting, in turn, cheaper for the customer. At least in the developed world, people changed into consumers of the globally provided goods.

But the price of the fossil fuel-based economies was, however, somewhere in the wind. Only a few noticed, only a few took care, only a few had been whistleblowing so that the world paid the real price for the modern way of living. Yes, fossil fuels cost us more than thought at first … But already as we have noticed yet another industrial revolution is knocking at our doors.

In the third industrial revolution of today, the communications are the Internet and the Internet of Things that allow for automated collection and passing over of data and information. In many industrial processes, the human touch is getting redundant. Good programming today saves time and human effort tomorrow.

New sources of power are based on renewable energy. The sources are there. The management still requires refinement. But it is doable. And those new sources of power, renewable sources of power, do not deplete. The Sun is shining, and the wind is blowing. Just so. These are natural processes of the Mother Earth. What is more, Mother Earth is not billing us for those processes. The energy is for free. We only need to learn to make proper use of it.

And all of these coincides today with the real-time climate changes. Yes, I would like to turn your attention to the expression Jeremy Rifkin uses in his lectures. Not the climate change any more, but the real-time climate change that happens right before our eyes.

Mobility may be based on electrical power generated with renewable resources. This is the future, and we know it for sure already. The socio-economic changes are, however, much more profound than that. They are much more profound than the energy resources changing the ways we power our socio-economic life. The expected future solutions for transportation are no longer only about the power generation anymore. They are about driverless autonomous vehicles. Still, some time will be needed until we achieve it. But the costs of transportation will be getting cheaper and cheaper.


What is more, during the first and the second industrial revolutions, we needed global companies vertically integrated, creating the value-added chains. Today in many industries, we no longer need that vertical integration. Thanks to the world wide web, we are going peer to peer. We are going person to person. We are going company to company without any intervention by the old-fashioned intermediaries. The exchange gets lateral. We can even talk about the lateral economies of scale. Some activities are getting more efficient and less costly.

The result of all of those changes in many fields of our life, by far of course, not all, is zero or near zero marginal costs for the individuals and the society as a whole.


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COLLABORATIVE COMMONS

It all started as people around the world began to upload their work into the worldwide web. These were their thoughts, essays, music, films, and some other content. The Wikipedia emerged, co-created by hundreds or even thousands of people from all around the globe, for free and available for free, managed with financial means collected through crowdfunding. The term collaborative commons appeared in the economists’ vocabulary.

Commons is a term defined already years ago. It referred to goods used by many and sometimes depleted through intensive overuse. The classic example is a generally available pasture where sheep graze. If sheep owners are not careful enough, sheep can eat so much grass that it will disappear completely, and the pasture will become useless for a long time. The problem is that as the pasture is a common good, people do not always take care … Economists used to call it the tragedy of the Commons.



Collaborative commons are more. These are goods co-created and co-used by many, available to everyone for free and seemingly not depletable. They had appeared beyond the market economy. The term prosumer, first used by the futurist Alvin Toffler in 1980 widespread in describing people who are both the creators or producers and simultaneously the consumers.

The content created in this worldwide collaboration decimated publishing industry, including newspapers, magazines, and book publishing. At first, everybody thought, let me cite Jeremy Rifkin yet again, that if they give some content for free, later the audience would be interested in paying for premium content. But at some moment, the critical mass of free content was reached. There was so much free content available on the world wide web that it would be difficult for the audience to consume. So, fewer and fewer people have been interested in premiums.

Of course, there are two sides to this coin. Some used to provide content professionally with a regular paycheck. And some use this free content and are happy that they can use it for free. In some professions, the work gets easier and easier.

I have returned to academia after ten years of absence. And now, I can see how much easier and more efficient my work is when I can use this content and devote more time to thinking. On one click, I have access to lectures conducted by worldwide recognized thinkers or to thoughts exchanged during professional conferences worldwide. You do not have to be there. You do not have to pay the fees and hotel bills. You do not lose time on travel there and back. Of course, you can’t exchange the thoughts you can’t discuss, you can’t ask questions, but still, the access to knowledge or ideas is unprecedented. It wasn’t like that in times as I did my lectures the first time 25 years ago. You had to look for books, and you had to spend a lot of time in a library or buy them. I neither have a problem with sharing that what I do with others. And to be frank, I am happy that I can do that without devoting time to writing and editing printed handbooks. But unlike professional journalists, I still meet students in the lecturing room, and quite much time of my professional life is advising. Providing content on the internet is not necessarily that how I make my living. Still, I maintain a regular blog, sharing my thoughts and photographs with others.


DISRUPTIONS IN THE PUBLISHING INDUSTRY

But now look at journalists. They should be paid for the work they do. Some work in media where advertisements provide enough money to pay them all, or they are lucky to work in a team that had convinced the audience to pay for premiums. Still, the content of the collaborative common provided en mass by people who share with others and take from others for free is the reason why the world will need less and less professional journalists. This is one of the professions on the list with the declining demand for their services due to technological development. In the 4.0 economy language, we would say that digital technology and the world wide web turn out to be disruptive for the publishing industry.

Do you remember how journalists and other people providing content professionally fought to be paid by giants like Google for the news feeds? The Google algorithms based on artificial intelligence pick up your interests and deliver the news feed you would be interested in. But think how many times you just read the headline and never went to the news agency website. You are well informed. For you, the cost of being informed is none. You only need to have a smartphone. We would call it the zero-marginal costs of information. But those who provided content got nothing for their work. And yet the things will be worse and worse for the journalists as bots are able today to pick up original news from news agencies and write an informative article.

Those changes do not mean that there is no place anymore for the journalists in this world. Contrary, there is; but being a journalist professionally will be something else than it used to be in the past. That what will count in the future is the added value brought by a human that cannot be filled in by the artificial intelligence alone.



ZERO OR NEAR ZERO MARGINAL COST SOCIETY

The same will in the future happen in the energy provision. Having your own photovoltaic panels, you will provide your household and maybe also others with your energy. The maintenance costs of your facility would be relatively low. The sun does not bill for the shining. After paying the fixed costs of investment into photovoltaics, anyone will be able to generate or provide energy at near-zero marginal costs. To clarify, the term marginal costs is mainly used here in the context of short-run variable costs, so the variable costs of producing one additional unit of output. But as the installation is a one-time investment for years, the economies of scale apply here. Hence, the long-run marginal costs with almost none-short run marginal costs with time, and more units produced will tend to be zero as well. Long-run marginal costs are all costs of producing an additional unit of output, including, for example, fixed costs of investment or replacement visible only through the perspective of a more extended period.



With more and more installations, the fixed costs will, for sure, go down. The marginal costs of producing solar panels will go down with more units produced, making the manufacturers lower their prices. The effect will be that lower fixed costs divided through generated energy units will make the additional unit of generated energy cheaper and cheaper. So that what will go down will be the long-run marginal costs of solar energy in the entire power market.

Jeremy Rifkin claims the same would also happen in the physical world. Due to automation based on algorithms, production, and delivery will be getting cheaper and cheaper. It is still some distant future development. The process will require more and more work on artificial intelligence and robotics. Yet, above all, vast amounts of smart sensors must be installed in production plants and alongside the delivery systems.

The marginal costs will be getting lower and lower if the delivery is conducted with electric vehicles working on cheap renewable power generated by the vehicle operator’s solar facility. The bill will not include the costs of diesel anymore. If the vehicles are autonomous, the bill will neither include the drivers’ salary anymore. The marginal cost curve of one vehicle-km will shift down towards zero. It will not tend to zero as with more veh-km repair costs increase, but the delivery price will still go down for sure. The other side of this coin is the zero marginal cost labor based on algorithms, artificial intelligence, and robotics that pushes human work out of the market.



The power market changes are, however, not only about near-zero variable costs of delivering energy. The issue is more complicated than that. About the inevitable changes in the power market, I will be talking some other time while talking about the access economy and the so-called smart grids, the energy grids, and networks that, unlike the conventional ones, do not work only one way from the power generator to the consumer. They work both ways, and thanks to digitization, they have multiple functionalities. Renewable energy that might be delivered by prosumers and smart grids is right now, distorting the old status quo in the energy market. The old conventional power plants are pushed out of the market. But the chance to get cheap energy at near-zero marginal costs is too appealing for the society. Besides, the zero net emission challenge to cope with real-time global warming makes this process irreversible.


Photos by Gabriela Palai, Belle Co, Flickr